Fed holds fire despite White House call for rate cuts

WASHINGTON – The US Federal Reserve is about to hold back this week, leaving US key rates unchanged as central bankers wait for clear indications of where the world's largest economy will go.

But as policymakers gather for their third meeting of the year Tuesday, President Donald Trump is still hitting the Fed, demanding that it lower its interest rates. He also planned to fill the vacancies in the Fed with political loyalists to help him get out of it.

Larry Kudlow, White House economic advisor, said Friday that the surprisingly strong growth in the first quarter of the year could "open the door to a reduction in the target rate in the coming months", while He was eager to add that he respected the independence of the Fed.

In addition, inflation "is well below its own benchmark," he told CNBC, citing the 2% target of the central bank, while its most watched remained stubbornly slow, reaching 1.3% in the first quarter of the previous year. year.

Fed Chairman Jerome Powell has staunchly defended the central bank's independence and has made it clear that policymakers will base their decisions on economic data.

After four increases in the benchmark lending rate in 2018, the Fed has made it clear that it will not increase its rates this year. And given the strength of recent data, a rate cut might seem counterintuitive.

But some economists still think the next move will be a reduction.

The minutes of last month's political meeting show that members of the Federal Open Market Committee on rate setting thought their policy could "change direction", at least by considering a possibility of rate cuts at a time given.

Futures markets seem convinced that the FOMC will feel compelled to lower rates at least once in the next nine months, and starting on Friday, the probabilities were 20%, it will be reduced as early as June.

In recent media interviews, Richard Clarida, vice president of the Fed, and Charles Evans, chairman of the Chicago Federal Reserve, acknowledged that a rate cut could become necessary.

& # 39; HMM … I DO NOT KNOW & # 39;

But with Wall Street oscillating to record levels with an unemployment rate below 4% and stable job creation, economists say that, for the moment, the central bank is holding on to the announced break. in December.

Ian Shepherdson of Pantheon Macroeconomics said Friday that the first quarter GDP could bring in "rising rates on the agenda" if it continued throughout the year.

But other economists have said the 3.2% growth recorded between January and March concealed alarming signs of weakness, such as falling imports, weak consumption, rising inventories and weak business investment. .

Diane Swonk, chief economist at Grant Thornton, told AFP that the estimate of GDP was "mediocre at 3%" and that it was hiding the warning signs in the details and that It was in a context of perpetually soft inflation.

In March, a closely monitored measure of consumer inflation reached its slowest pace in 13 months. And the Fed's preferred gauge, the "core" of consumer spending prices, has not exceeded the Fed's 2% target in seven years.

"The fact is that once inflation has started to decline, even if the economy is stronger, something is wrong," Swonk said.

Although unemployment is low and wages start to rise, price pressures simply have not responded, leaving the Fed with little incentive to push its target rate range higher.

"They would like to stay optimistic for their next move but there are enough people sitting out there saying, 'Hmm … I do not know.' This keeps the Fed firmly on the sidelines." , she said.

"Their cautious optimism is the best way to play."