The Federal Reserve voted Wednesday to hold its interest rate target steady in what will likely be the last meeting for outgoing Fed Chairman Jerome Powell.
After a two-day meeting in Washington, the Fed’s monetary policy committee announced it would hold its rate target at a range of 3.50%-3.75%. Investors had expected that outcome, as the country continues to grapple with too-high inflation driven in large part by higher energy prices stemming from the Iran war.
WARSH SET TO TEST LIMITS OF FED REFORM
Fed governor Stephen Miran, who was nominated by Trump, voted against the decision Wednesday, saying that he preferred a quarter-percentage-point rate cut.
But three other Fed participants also dissented from the other side, indicating that they thought that the Fed’s next move might be to raise rates rather than lower them. They said that, while they supported holding rates steady, they “did not support inclusion of an easing bias in the statement at this time.”
Powell’s presumed successor, former Fed governor Kevin Warsh, advanced through committee on Wednesday just before the Fed vote, clearing the way for a full floor vote in time for him to be seated for the Fed’s next meeting in June.
After the Wednesday meeting, Powell announced that he will remain on the Fed’s Board of Governors beyond the end of his term as chairman next month, breaking with tradition at the central bank and preventing Trump from quickly nominating his replacement.
The Wednesday decision to hold interest rates steady comes as the labor market experiences a slight slowdown that some argue should necessitate lower interest rates. Still, the softening of the labor market has not progressed to a point that would force the Fed to cut rates rapidly, and inflation is still up.
While still high, inflation is lower than during the worst of the Biden administration years, when prices rose as much as 7% in one year. The Fed’s goal, what it considers to be healthy, is long-run 2% inflation. But, in the most recent consumer price index report, inflation shot up nine-tenths of a percentage point to 3.3% on the year in March.
While most of that massive increase came from the energy price increases resulting from Iran, inflation has been running above 2% for years now. Some economists fear that, if interest rates were to be cut, price growth would lurch even higher.
The economy showed surprising strength by adding 178,000 jobs in March, and the unemployment rate fell slightly to 4.3%, the Bureau of Labor Statistics said in an update last week. Still, overall employment growth has slowed gradually over time.
After Wednesday’s meeting, all eyes are now turning to Warsh, whose nomination and confirmation have been overshadowed by the Justice Department’s investigation into Powell, which it recently called off.
In January, Powell disclosed a DOJ investigation into his testimony about cost overruns on a Fed construction project and said that the inquiry was an effort by Trump to sway him to change interest rate policy.
Retiring Sen. Thom Tillis (R-NC), a member of the Senate Banking, Housing, and Urban Affairs Committee, vowed to block Warsh’s nomination until the investigation was concluded, a threat that could have meant that Warsh would miss key Fed votes and Powell would remain on the board.
U.S. Attorney Jeanine Pirro announced Friday that the DOJ was dropping the investigation. She said that, instead, the inspector general for the Fed has been asked to scrutinize the building cost overruns.
“I expect a comprehensive report in short order and am confident the outcome will assist in resolving, once and for all, the questions that led this office to issue subpoenas,” she said. “Accordingly, I have directed my office to close our investigation as the IG undertakes this inquiry.”
“Note well, however, that I will not hesitate to restart a criminal investigation should the facts warrant doing so,” Pirro added.
Still, all Democrats on the banking committee voted against advancing Warsh’s nomination on Wednesday. Many fear that the independence of the Fed is in jeopardy and the committee’s ranking member, Sen. Elizabeth Warren (D-MA) has said that a “scheme to take over the Fed” is still in place, despite the investigation being dropped.
Despite the concerns, Warsh tried to assure lawmakers during his confirmation hearing that he would ensure the Fed stays independent and insulated from political pressure.
“Let me be very clear: Monetary policy independence is essential,” Warsh told the panel. “Monetary policy makers must act in the nation’s interest. Their decision is the product of rigor, deliberation, and unclouded decision-making.”
WARSH SAID HE NEVER MADE ANY PROMISES ON INTEREST RATES TO TRUMP
Still, he argued that politicians, including Trump, weighing in on interest rate policy is not necessarily a threat to Fed independence.
“I do not believe that independence of monetary policy is threatened when elected officials state their views on rates,” he said. “Fed independence is up to the Fed.”
