Fed faces potential backlash from Trump by maintaining current interest rates

Federal Reserve Maintains Interest Rates Amid Political Tensions

The Federal Reserve has opted to keep interest rates steady, maintaining the range between 3.5% and 3.75%. This marks the first time since July that rates have not been adjusted, despite significant pressure from President Donald Trump to lower borrowing costs further.

This decision follows a series of rate reductions in September, October, and December of the previous year. The move is expected to frustrate President Trump, who has repeatedly criticized Fed Chair Jerome Powell for not cutting rates more aggressively, even suggesting that rates should be as low as 1%.

Last month, the Federal Open Market Committee (FOMC) reduced rates to their lowest level in three years, responding to concerns about rising unemployment and a softening labor market. On Wednesday, Jerome Powell noted that while inflation remains somewhat high, the U.S. economy is fundamentally strong and unemployment levels are stabilizing. However, he cautioned that the housing sector continues to struggle.

Ongoing disputes between President Trump and Chair Powell have raised concerns about the Federal Reserve’s independence, especially after the President’s public criticisms. Earlier this month, the Department of Justice launched a criminal investigation into Powell, a move he described as an attempt to undermine the central bank’s autonomy. The investigation centers on a $2.5 billion renovation of the Fed’s headquarters, which has exceeded its budget.

Powell asserted that the real motivation behind the probe is the Fed’s refusal to set interest rates according to the President’s preferences, warning of the dangers of political interference. Central bankers worldwide, along with former Fed leaders and Treasury secretaries, have condemned the investigation.

Former Bank of England Governor Lord King recently warned that President Trump’s attacks on the Fed could push the U.S. economy toward a severe recession. He emphasized the risks of dismissing inflation concerns, noting that such complacency can lead to persistent inflation that may only be resolved through a deep economic downturn.

The investigation into Powell follows Trump’s attempt to remove Fed Governor Lisa Cook over unsubstantiated allegations of mortgage fraud, a case now before the Supreme Court. Powell described this legal battle as potentially the most significant in the Fed’s 113-year history.

Key Developments and Market Reactions

Powell defended his decision to appear alongside Lisa Cook at the Supreme Court, despite criticism from Treasury Secretary Scott Bessent. Powell explained that he felt it would be difficult to justify not attending such a pivotal hearing.

With Powell set to step down in May, he is expected to oversee two more interest rate decisions before a new chair is appointed by President Trump.

Market Response:

• The Federal Reserve’s decision to hold rates was widely anticipated.
• U.S. stocks fluctuated after the announcement, with the S&P 500 retreating from a record high above 7,000 points earlier in the session.
• The dollar dropped to a four-year low following renewed threats from President Trump regarding Iran.

Advice for the Next Fed Chair

When asked for guidance for his successor, Powell advised, “Stay out of politics. Don’t get drawn into political disputes.”

Consumer Spending and Economic Outlook

Powell noted that American households are tightening their budgets due to affordability challenges. Retailers serving lower-income customers report that consumers are opting for less expensive brands and reducing overall spending. Powell emphasized the Fed’s awareness of these concerns.

Commitment to Central Bank Independence

Powell stressed the importance of maintaining the Federal Reserve’s independence, warning that losing public trust in the institution’s impartiality would be difficult to recover. He reaffirmed his and his colleagues’ dedication to this principle.

Wall Street’s Reaction

Following the Fed’s announcement, U.S. stock indices experienced modest declines. The S&P 500 slipped 0.1% to 6,970 points after surpassing 7,000 earlier, while the Dow Jones Industrial Average also edged down. In contrast, the Nasdaq Composite rose 0.3%.

Fiscal Deficit Concerns

Powell highlighted the urgent need to address the U.S. federal budget deficit, noting that running large deficits during periods of full employment is unsustainable and requires prompt action from policymakers.

Consensus on Holding Rates

There was broad agreement within the FOMC to keep rates unchanged, though Powell acknowledged ongoing tension between the goals of full employment and controlling inflation.

Economic Forecast Remains Positive

Powell described the outlook for the U.S. economy as robust, with growth indicators and labor market data suggesting continued stability.

Legal and Political Challenges

Powell declined to comment on the Fed’s response to Justice Department subpoenas or his future plans after his term ends in May.

The Supreme Court case involving Lisa Cook is seen as a landmark legal challenge for the central bank, as she contests her removal from the board over disputed allegations.

Outlook for Future Rate Cuts

Analysts at Capital Economics believe further rate reductions are unlikely in the near term, with the FOMC noting that economic activity is expanding at a solid pace and inflation remains elevated.

Currency and Bond Market Movements

The dollar strengthened after the Fed’s decision, with the dollar index rising 0.4% to 96.64. Yields on 10-year Treasury bonds also increased. Earlier, the dollar had reached a four-year low following geopolitical tensions.

Dissenting Votes Within the Fed

Two FOMC members, Stephen Miran and Christopher Waller, voted in favor of an additional rate cut. Miran, appointed by Trump, has previously advocated for more aggressive reductions, while Waller is considered a potential candidate to succeed Powell.

Economic Policy and Inflation

Analysts suggest that the next rate cut may not occur for several meetings, as inflation remains a concern and the Fed seeks to maintain its independence despite political pressure.

Cryptocurrency and Market Impact

Bitcoin surged 3% to $90,025 as the dollar weakened, while Solana also saw gains. The declining dollar has reduced returns for UK investors holding U.S. assets, with the S&P 500’s gains translating to more modest returns when converted to pounds.

Global Markets and Commodities

European and UK stock indices declined ahead of the Fed’s rate decision and major tech earnings reports. Oil prices reached a four-month high, driven by a weaker dollar and geopolitical developments in the Middle East.

U.S. Economic Policy and the Dollar

Treasury Secretary Scott Bessent credited Trump administration policies for making the U.S. an attractive destination for business, emphasizing the importance of sound fundamentals for a strong dollar.

Investor Focus Shifts to Technology and AI

With the S&P 500 at record highs, attention may soon return to artificial intelligence as major tech companies prepare to report earnings.

Dollar’s Decline and Policy Implications

The Trump administration’s apparent acceptance of a weaker dollar is seen as part of a broader strategy to stimulate economic growth and reduce the trade deficit. However, a sustained decline could make U.S. assets less attractive to investors.

Record Highs for U.S. Stocks

The S&P 500 surpassed 7,000 for the first time, with other major indices also posting gains. Analysts note that a weaker dollar typically supports global liquidity and risk markets.

Fed Expected to Hold Rates Steady

Despite calls for further cuts, the Fed is widely expected to keep rates unchanged, with the committee divided over the best course of action amid persistent inflation and a stabilizing job market.

Dollar’s Slide and Market Sentiment

The U.S. dollar has experienced its steepest weekly decline since last April, with President Trump’s comments contributing to further weakness ahead of the Fed’s decision. Analysts warn that ongoing policy unpredictability could prolong this trend.

Gold Reaches New Highs

Gold prices have soared to record levels, fueled by the dollar’s weakness and investor concerns about currency debasement. The precious metal has risen sharply in January, reflecting a shift toward safe-haven assets.

Trump’s Influence on the Dollar

Economists warn that President Trump’s unpredictable policy approach and pressure on the Fed are eroding confidence in the dollar, accelerating its decline against major currencies and raising concerns about global de-dollarization.

UK and European Markets React

The FTSE 100 and other European indices have been impacted by the dollar’s fall, with luxury stocks and companies reporting in dollars particularly affected. Strong demand for AI-related technology has provided some support to tech stocks.

Oil Prices and Currency Movements

Oil prices have climbed to multi-month highs as the weaker dollar makes commodities more affordable. Geopolitical tensions and supply concerns have also contributed to the rally.

Further Dollar Weakness Expected

Economists anticipate additional downside for the dollar, citing recent policy missteps and ongoing global uncertainties. The currency’s decline is reminiscent of previous episodes triggered by trade disputes and tariff rollouts.

ECB May Respond to Stronger Euro

The European Central Bank could consider rate cuts if the euro continues to appreciate against the dollar, as a stronger currency may dampen inflation within the eurozone.

Trump’s Economic Strategy

Analysts believe President Trump aims to further stimulate the U.S. economy ahead of the mid-term elections, leveraging fiscal measures and previous rate cuts to maintain momentum.

Gold and Safe-Haven Assets in Demand

As confidence in the dollar wanes, investors are increasingly turning to gold and other precious metals, which have seen significant gains this year.

What to Watch Today

• London’s last independent gun shop to close amid tax changes: William Evans, a historic gun maker, will shut after more than 80 years at its St James’s location.
• Pub chain collapse linked to tax raids: The Revel Collective is selling parts of its business after job losses.
• Europe sources gas from Australia: U.S. snowstorms disrupt pipelines, prompting a search for alternative supplies.
• BBC cuts investigation team: Efforts to reduce costs lead to the closure of BBC Trending.
• Gambling industry faces higher fees: Leaked documents reveal plans to raise licence fees by up to 30%.

Overnight Market Highlights

As the dollar’s decline deepened, Asian markets showed mixed results. The S&P 500 reached a new record, while South Korea’s Kospi hit an all-time high, buoyed by technology stocks. Japan’s Nikkei 225 fell, pressured by the weaker dollar’s impact on exporters. Gold and silver prices surged, reflecting increased demand for safe-haven assets.

On Wall Street, stocks advanced, led by gains in major technology firms, as investors awaited the Fed’s rate decision. The S&P 500 closed at a record, while the Dow Jones and Nasdaq also posted notable moves.