The Fed is relishing fighting the White House flab

It’s been a week of novel communications from Federal Reserve officials who appear to be enjoying their new “can’t be fired” protection from the US Supreme Court.

In contrast, Donald Trump does not seem to like the new environment so much.

The president summoned the Fed chair for a meeting on Thursday, in which he told Jay Powell that the Fed was “making a mistake by not lowering interest rates, which is putting [the US] at an economic disadvantage to China and other countries”. We know this not because Trump claimed victory on social media later, but because he left it to his press secretary Karoline Leavitt to comment.

She did not dispute the Fed’s account, posted on its website, which demonstrated Jay Powell was hearing Trump but not acquiescing. For the full brutality, it is worth noting down the Fed statement in full.

At the president’s invitation, chair Powell met with the president today at the White House to discuss economic developments including for growth, employment and inflation.

Chair Powell did not discuss his expectations for monetary policy, except to stress that the path of policy will depend entirely on incoming economic information and what that means for the outlook.

Finally, chair Powell said that he and his colleagues on the FOMC will set monetary policy, as required by law, to support maximum employment and stable prices and will make those decisions based solely on careful, objective and non-political analysis.

The Trump administration’s belly fat

Another Fed official who offered a far from flattering opinion on Trump’s policies was Austan Goolsbee, Chicago Fed president and a voting member of the Federal Open Market Committee.

Interviewed at the Mackinac Policy Conference, he also stuck to the strict Fed script that the dual mandate dominates everything he considers. “If it affects prices or affects employment, we have to think about it,” he said.

Trump’s willingness to insist on lower interest rates fails this test, Goolsbee added. His social media posts “feel a little more like an expression of desire on rates”, he said.

The Chicago Fed president loves a folksy anecdote. One of his favourites is to use a Midwest weather metaphor to explain why Fed officials should never complain about the conditions they face. “There is no bad weather, only bad clothing,” he said. “You tell me what the conditions are and I’ll tell you what clothes to wear.”

To the uncharitable, what came next felt quite like a complaint about the conditions, however. He said he had recently hired a personal trainer with the aim of rediscovering his six pack. She told him everyone has a six pack underneath, you’ve just got to get all the fat off first before you can see it.

“I feel a bit like that on the economy. If we could get this [fat] off of there, there’s a six pack underneath.” There was no doubt in the context of the chat that the fat he was talking about was Trump’s tariffs.

And if they come off?

That was even clearer. He said that without tariffs the US economy had low, stable unemployment and inflation heading back to the 2 per cent target. “If you have stable full employment and inflation going to target, rates can come down to where they would eventually settle,” and that is “well below where they are today”.

As the table below shows, there is little doubt that ahead of the main tariff effects, the inflation measured by the personal consumption expenditure deflator in April was benign.

Still all to play for in the autumn

The one significant dissenter to tariff complaints on the FOMC of late has been Christopher Waller, a Fed governor who is a possible replacement for Powell as Fed chair.

Speaking at the start of this week in Korea, he again said he expected any inflation from tariffs to be “transitory”, and held out the prospect of lower rates for “good news” reasons. He was rather more positive than Goolsbee, who linked lower rates to tariffs coming off.

That said, his key sentence was gloriously conditional. I am sure he hopes Trump will hear “rates coming down”, while others hear, “we can cut rates when things get back to normal”. The specific words were:

Assuming that the effective tariff rate settles close to my lower-tariff scenario, that underlying inflation continues to make progress to our 2 per cent goal, and that the labour market remains solid, I would be supporting “good news” rate cuts later this year.

Take the summer off

There is no sign that the Fed will decide anything soon. In fact, Dallas Fed president Lorie Logan gave us all an excuse to take a long summer holiday.

With unemployment low, inflation falling and risks running both ways, she echoed Powell in saying the stance of US monetary policy was in a good place. “It could take quite some time to know whether the balance of risks is shifting in one direction or another,” she said.

While we are at the Dallas Fed, its economists last week noted how the Fed’s Beige Book had been rather shoddy recently. Instead of giving an accurate anecdotal picture of US economic trends as it used to, their take was that since 2022 it has been overly pessimistic. Their analysis showed that the report tends to measure cyclical parts of the US economy — manufacturing, construction, retail and real estate — which have not been the drivers of US growth recently and so are unrepresentative of the wider economy.

This is something to remember when the latest Beige Book is published on Wednesday.

What I’ve been reading and watching

Former European Central Bank supervisory board member Ignazio Angeloni worries about money in the Eurozone in light of the growth of US dollar stablecoins. Given the momentum behind the digital euro, he worries too much.

The world of work, it turns out, is much better than we feared at the time of the millennium. We’re healthier and working longer on average, raising the prospect of better retirements.

Stan Fisher, perhaps the most influential policymaker of recent times, who served at the Fed, Bank of Israel, IMF and World Bank, has died.

Slovakia’s government is hardly excelling itself, by keeping in post a central bank governor convicted of bribery.

A chart that matters

Christine Lagarde has a simple technique of communication and it is one journalists know well — repetition. I won’t have the formulation of words quite right, but I know that the ECB takes a meeting-by-meeting, data-dependent view and will decide monetary policy on the basis of the inflation outlook, the dynamics of underlying inflation and the transmission of monetary policy to households and companies. Shout if I’ve got that wrong.

The central bank’s blog produced some projections of the borrowing costs likely to be paid by households with mortgages for the rest of the decade. Even though official interest rates have fallen from 4 per cent to 2.25 per cent, mortgage rates are still rising as many people come to the end of their fixed-rate periods and now have to settle for a higher rate.

Poorer households have already felt the pinch more than richer ones, because fewer fix for long periods and the rates also differ between countries.

Even though the ECB’s blog is run by staff and the views “do not necessarily represent the views of the European Central Bank and the Eurosystem”, the message is clear that the transmission of monetary policy is still getting more restrictive — at least for mortgages.

Central Banks is edited by Harvey Nriapia