AI-Summary – News For Tomorrow
The Federal Reserve began cutting interest rates in late 2024 but paused due to firm employment and persistent inflation. Future policy decisions will be driven by employment and inflation data, with the Fed carefully analyzing price data to distinguish underlying pressures from tariff effects. Political influence, particularly from President Trump’s desire for lower rates and appointments of like-minded individuals to the Federal Reserve Board, poses a challenge to the Fed’s independence. Despite the economic evidence suggesting a pause, the Fed may continue small rate cuts into 2026, balancing economic considerations with the need to preserve its perceived independence amidst political pressure.
News summary provided by Gemini AI.
Federal Reserve “dot plot” of interest rate expectations
Federal Reserve
The Fed began interest rate cuts in September 2024 with a half-point drop in the Federal Funds rate, followed by quarter-point cuts in November and December. Then they saw employment statistics looking firm while inflation persisted above the Fed’s target of two percent. They held interest rates steady until September 17 of this year, when they lowered the policy rate by a quarter of a percentage point.
Three issues will dominate policy decisions, or possibly just two. Certain to play large roles will be employment and inflation. Politics will likely also influence decisions, though possibly without any open discussion in the Fed’s official meetings. The decision-makers, however, talk among themselves privately before their meetings, and politics cannot be avoided.
Employment Data And The Fed
Inflation Data And The Fed
The Federal Reserve policy makers will also be watching inflation data carefully. Here the Fed’s large staff will come in handy. The price data collected every month will show the result of both underlying inflationary pressures and tariffs. Figuring the contribution of those two forces will be essential to good policy—but also very difficult. Right now it appears that tariffs are not influencing overall inflation much. But total inflation worsened in recent months, leading to the age-old statistics question: are recent changes a blip or the beginning of a trend?
No doubt tariffs will enter into the consumer price data. The Fed will be inclined to ignore tariff-driven price hikes, on the grounds they constitute one-time forces that cannot be fought with monetary policy. Consumers will howl, whatever causes their shopping bills to rise, and some politicians will not grasp the nuance in the statistics.
And that brings the Fed back to politics.
Politics And The Fed’s Policies
President Trump clearly wants to see lower interest rates. His latest appointee to the Federal Reserve Board, Stephen Miran, voted against the recent quarter-point rate cut because he wanted a half-point cut. Although the Fed is structured to insulate decisions from politics, no insulation is perfect. And the president has a potential power play available to him.
Interest rate decisions are made by the Federal Open Market Committee (FOMC), which consists of the seven members of the Fed’s Board of Governors and the 12 presidents of the regional Federal Reserve Banks. Only four of the 12 presidents vote. The New York Fed president always votes, while the other presidents rotate for one-year periods as voting members. All presidents take part in the discussions.
The Fed governors are appointed by the president and confirmed by the Senate. They enjoy 14-year terms, though few of them stay on the job that long. On average, we get one new member per year.
The highly-political possibility has President Trump appointing to the Board people who will pursue his agenda. With four votes, they would control the Board and thus enough of the regional bank presidents to have a majority of the FOMC. But this scenario strongly needs highly political appointees who remain loyal to the president. In the past, most FOMC members appreciated the independence of the Fed and used their own judgment in both monetary policy decisions and appointments. This scenario also needs the president’s nominees to win Senate confirmation. If four Republicans vote against a nominee, then the plan doesn’t work.
The Federal Reserve’s Interest Rate Choices In Late 2025 And 2026
With these countercurrents, the FOMC will likely continue small interest rate cuts through the end of the year and early 2026. I personally think the weight of economic evidence dictates no further cuts for a while, but politics will influence decisions. Preserving the Fed’s independence may require ceding a little bit of that independence, the thinking will be.
