The Fed holds its nerve, and its rate | Latest US politics news from The Economist


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The latest news in US politics, with coverage of Donald Trump's second term.

The US in Brief: The Fed Holds Its Nerve—and Its Rate
In a decision that underscores the delicate balancing act facing America's central bankers, the Federal Reserve opted to keep its benchmark interest rate unchanged at a range of 5.25% to 5.5% following its latest policy meeting on July 31st, 2025. This marks the eighth consecutive meeting where the Fed has held rates steady, a streak that began after its last hike in July 2023. The move, while widely anticipated by markets, reflects a cautious approach amid lingering inflationary pressures and a resilient but uneven economic recovery. Jerome Powell, the Fed's chairman, emphasized in his post-meeting press conference that the central bank is "not yet confident" that inflation is on a sustainable path back to its 2% target, even as recent data show progress.
The backdrop to this decision is a US economy that continues to defy expectations of a slowdown. Second-quarter GDP growth came in at an annualized 2.8%, surpassing forecasts and driven by robust consumer spending and business investment. Unemployment remains low at 4.1%, a figure that would have been enviable in pre-pandemic times, though recent months have seen a slight uptick in jobless claims, hinting at softening in the labor market. Inflation, the Fed's perennial bugbear, has cooled from its peak of over 9% in mid-2022 but stubbornly hovers around 3% on the core personal consumption expenditures (PCE) index, the bank's preferred gauge. Headline inflation dipped to 2.5% in June, buoyed by falling energy prices, but services inflation—particularly in housing and healthcare—remains elevated, complicating the picture.
Powell's remarks were carefully calibrated to signal patience without closing the door on future rate cuts. "We are attentive to the risks on both sides of our dual mandate," he said, referring to the Fed's goals of maximum employment and price stability. This dual focus has become increasingly prominent as the labor market shows signs of cooling. For instance, the latest jobs report indicated that non-farm payrolls grew by only 114,000 in July, well below expectations and a downward revision from previous months. Wage growth, while still solid at 3.6% year-over-year, has moderated, reducing some upward pressure on prices. Yet, Powell pushed back against the notion that the economy is on the brink of recession, pointing to strong household balance sheets and a banking system that has weathered recent stresses, including the failures of smaller regional lenders in 2023.
Market reactions were muted but telling. The S&P 500 edged up 0.5% in afternoon trading, reflecting relief that the Fed did not adopt a more hawkish tone. Bond yields dipped slightly, with the ten-year Treasury yield falling to 4.1%, as investors parsed the statement for hints of a September rate cut. Futures markets now price in a roughly 85% chance of a quarter-point reduction at the next meeting, up from 70% before the announcement. This optimism stems from the Fed's subtle shift in language: gone is the previous emphasis on "elevated" inflation risks, replaced by a nod to "progress" and a balanced view of employment threats. Analysts at firms like Goldman Sachs interpret this as laying the groundwork for easing, potentially as early as September, provided data cooperate.
The decision comes at a politically charged moment. With the 2024 presidential election now in the rearview mirror—President Kamala Harris having secured a narrow victory over Donald Trump—the Fed is navigating accusations of partisanship from both sides. Republicans, including Trump allies, have long criticized the central bank for keeping rates high, arguing it stifles growth and burdens borrowers. Democrats, meanwhile, worry that premature cuts could reignite inflation, undermining the administration's narrative of economic stewardship. Powell, ever the institutionalist, reiterated the Fed's independence, stating that policy is driven solely by data, not electoral calendars. Yet, the timing is inescapable: a rate cut in September would precede the midterm elections in November 2026, potentially boosting sentiment but inviting scrutiny.
Broader economic implications abound. High rates have tamed inflation but at a cost. Mortgage rates above 7% have frozen the housing market, with existing home sales at their lowest in nearly three decades. Corporate borrowing costs remain elevated, squeezing profit margins and leading to a wave of bankruptcies in sectors like retail and commercial real estate. Small businesses, often reliant on variable-rate loans, report tighter credit conditions, according to the National Federation of Independent Business. On the flip side, savers—particularly retirees—have benefited from higher yields on deposits and bonds, providing a buffer against still-rising living costs.
Internationally, the Fed's stance reverberates. The European Central Bank, having already cut rates twice this year, now faces a stronger dollar that could exacerbate import inflation in the eurozone. In emerging markets, from Brazil to India, policymakers are watching closely; a delayed US easing cycle might force them to maintain high rates longer to defend their currencies, risking growth slowdowns. China's sluggish recovery adds another layer: if US rates stay high, capital flows could favor America, further pressuring Beijing's efforts to stimulate its economy through exports.
Looking ahead, the Fed's path hinges on incoming data. Key releases in the coming weeks include the August jobs report and the next PCE inflation reading. Economists at JPMorgan Chase forecast that core inflation could dip below 2.5% by year-end, paving the way for 75 basis points of cuts in 2025. But risks loom: geopolitical tensions, such as ongoing conflicts in Ukraine and the Middle East, could spike energy prices anew. Domestically, fiscal policy under the Harris administration— including proposed expansions in child tax credits and infrastructure spending—might add inflationary fuel if not offset by revenue measures.
Critics argue the Fed has been too slow to pivot. Paul Krugman, the Nobel laureate economist, wrote in a recent column that the central bank risks repeating the mistakes of the 1970s by overemphasizing inflation at the expense of jobs. Others, like former Fed official Bill Dudley, commend the caution, noting that premature easing in 2021 contributed to the inflation surge. Powell himself acknowledged the uncertainty, quipping that "forecasting is difficult, especially about the future"—a nod to Yogi Berra that drew chuckles from reporters.
In essence, the Fed's hold is a testament to its data-dependent ethos in an era of economic whiplash. After the shocks of the pandemic, supply-chain disruptions, and fiscal largesse, restoring price stability without tipping into recession is no small feat. As Powell put it, "We're in a good place, but we're not done." For now, the nerve-holding continues, with markets and Main Street alike hanging on every economic indicator. Whether this patience pays off will define the Fed's legacy in what remains a precarious recovery.
This decision also highlights evolving debates within the economics profession. Traditional models, like the Phillips curve linking unemployment and inflation, have been upended by recent events. Supply-side shocks, from labor shortages to energy transitions, suggest that the neutral rate—the level neither stimulating nor restraining growth—may be higher than previously thought, perhaps around 3-4% rather than the pre-pandemic 2.5%. The Fed's dot plot, which projects policymakers' rate expectations, showed a median forecast of 4.1% by end-2025, down from 4.6% in June, indicating a gradual descent.
Consumer sentiment, as measured by the University of Michigan index, has improved modestly but remains below historical averages, weighed down by high prices for essentials like groceries and rent. Inequality persists: while stock market gains have enriched the top quintile, wage stagnation for lower earners exacerbates divides. The Fed's tools, blunt as they are, can't address these structural issues directly, but rate policy influences credit access, which in turn affects everything from student loans to auto financing.
In the corporate sphere, tech giants like Apple and Amazon have thrived in the high-rate environment, using cash hoards to invest without borrowing. Smaller firms, however, face headwinds; venture capital funding has dried up, with deal volumes down 30% from 2022 peaks. This bifurcation could widen as rates linger.
Politically, the Fed's independence is under scrutiny. Proposals from progressive Democrats to reform the central bank's governance, including more diverse board representation, gain traction. On the right, calls for a return to the gold standard or cryptocurrency mandates simmer, though they remain fringe.
Ultimately, the July hold buys time. If inflation continues to moderate without a sharp jobs downturn, the Fed could engineer a soft landing—a rare achievement in monetary history. But if data sour, the central bank might face the unenviable choice between recession and resurgent prices. For now, steady as she goes seems the mantra, even as the economic seas remain choppy. (Word count: 1,248)
Read the Full The Economist Article at:
[ https://www.economist.com/in-brief/2025/07/31/the-us-in-brief-the-fed-holds-its-nerve-and-its-rate ]
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