By AP Economics Writer Christopher Al Gerber
WASHINGTON (AP) — The Federal Reserve may not change its major short-term interest rates Wednesday despite weeks of harsh criticism and demand from President Donald Trump that the Fed will cut borrowing costs.
After causing a sharp drop in financial markets two weeks ago, Trump has since stepped back and said he could fire Fed Chairman Jerome Powell. Still, he and Treasury Secretary Scott Bescent said the Fed should cut interest rates.
They argue that inflation is steadily cooling and that high borrowing costs are no longer needed to keep prices up. The Fed has spiked short-term rates sharply as pandemic-era inflation surged in 2022 and 2023.
Separately, Trump’s government efficiency director Elon Musk suggested last Wednesday that Doge should take a closer look at the Fed’s spending on facilities.
The scrutiny shows that, despite its position as an independent institution, the Fed remains subject to unusually sharp political pressure, even if the Trump administration retreated the threat of firing Powell.
Still, the Fed will almost certainly change its key rate to around 4.3% when it meets Tuesday and Wednesday. Many of the other 18 officials sitting on the Federal Reserve pricing committee say they want to see how Trump’s tariffs will affect the economy before making the move.
But Trump said on Friday that the truth about social media platforms. Social claimed “no inflation,” and claimed that groceries and egg prices fell, causing gas to fall to $1.98 per gallon.
That’s not entirely true. Grocery prices have increased by 0.5% over the past three months, up 2.4% over a year ago. Gas and oil prices have fallen – gas costs have fallen by 10% from a year ago – continuing a long-term trend that has been partially continuing due to fears of weakening the economy. Still, according to the AAA, gas prices nationwide are $3.18 per gallon.
Inflation fell significantly in March, according to the Fed’s preference gauge.
Without tariffs, economists say the Fed could soon lower its benchmark rate. This is because it is currently at a level aimed at delaying borrowing and spending. But the Fed can’t cut fees now with a wide range of tariffs that are likely to raise Trump’s broad tariffs in the coming months.
BNY chief economist Vincent Reinhart said the Fed was “harmed” by what happened in 2021. Instead, inflation surged to a peak of 9.1% in June 2022.
This time they will be more cautious, he said.
“It’s the Fed who waits for evidence and adjusts that evidence,” Reinhart said.
Additionally, Trump’s Powell badging makes it difficult for the Fed chair to cut interest rates.
“We could imagine a world where they would lower rates without the pressure from the Trump administration… because they feel comfortable having the argument that they are doing so for the sake of data,” he said.
On his part, Powell said last month that tariffs are likely to boost inflation and slow the economy. Central banks usually either raise rates or at least continue to raise them to combat inflation – if unemployment rates rise, they cut them to promote the economy.
Powell said the impact of tariffs on inflation is temporary and could be a one-off price increase, but recently it has “may be more sustainable.” This suggests that Powell would like to wait a few months potentially to avoid ensuring that inflation will be raised sustainably before the fees are cut.
Some economists have predicted that the Fed will not cut fees until or after the September meeting.
But Fed officials can move faster if tariffs hit the economy enough to cause layoffs and boost unemployment. Wall Street investors seem to be hoping for such a result. They predict that the first cut will occur in July, according to futures pricing.
Separately, Musk criticized her on Wednesday for spending $2.5 billion on massive renovations to two Washington, D.C. buildings.
“At the end of the day, this is all taxpayer money, so you should definitely see if the Federal Reserve actually spends $2.5 billion on interior designers,” Musk said. “It’s a lazer on the eyebrows.”
Federal Reserve officials acknowledge that renovation costs have risen as building materials and labor prices have skyrocketed amid post-pandemic inflation. And a former Fed official speaking in the background says local regulations have forced the Fed to force more expansions rather than making the building taller.
Meanwhile, when Powell’s term expires next year, Kevin Wersch, a former Fed governor and a potential candidate to replace Powell with chairman, said recently that the Fed has attracted greater surveillance as it has not kept prices down.
“The Fed’s current wounds are largely self-harmed,” he said in a speech at the International Monetary Fund conference in late April. “A strategic reset is needed to mitigate loss of reliability, change in status, and most important, more important economic outcomes for our fellow citizens.”
“Fed Independence is very widely understood and in Washington, that’s really important,” Powell said last month.
Original release: May 5, 2025 9:02am EDT
