U.S. Federal Reserve leaves interest rates unchanged even as Trump demands cuts

Federal Reserve Chairman Jerome Powell listens as President Donald Trump visits the Federal Reserve, Thursday, July 24, 2025, in Washington. (AP Photo/Julia Demaree Nikhinson, File)

WASHINGTON — The U.S. Federal Reserve left its key short-term interest rate unchanged for the fifth time this year, brushing off repeated calls from U.S. President Donald Trump for a cut.

The Fed’s decision Wednesday leaves its key short-term rate at about 4.3 per cent, where it has stood after the central bank made three cuts last year. Chair Jerome Powell has said the Fed would likely have cut rates already if not for Trump’s sweeping tariffs. Powell and other Fed officials say they want to see how Trump’s duties on imports will impact inflation and the broader economy. So far the duties have lifted costs of some goods, such as appliances, furniture, and toys, and overall inflation has risen a bit, though less than many economists had expected.

There were some signs of splits in the Fed’s ranks: Governors Christopher Waller and Michelle Bowman voted to reduce borrowing costs, while nine officials, including Powell, favored standing pat. It is the first time in more than three decades that two of the seven Washington-based governors have dissented. One official, Governor Adriana Kugler, was absent and didn’t vote.

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The choice to hold off on a rate cut will almost certainly result in further conflict between the Fed and White House, as Trump has repeatedly demanded that the central bank reduce borrowing costs as part of his effort to assert control over one of the few remaining independent federal agencies.

At a news conference, Powell said that tariffs are starting to push up the cost of goods, while the price of services — rents, insurance, and hotel rooms — has continued to cool.

He suggested it could take some time to determine whether the tariffs are having a one-time effect or are pushing up prices more persistently.

“We think we have a long way to go to really understand exactly how” the tariffs and prices will play out, Powell said.

Many economists and Wall Street investors have expected the Fed to cut its rate at its next meeting in September, but Powell’s remarks suggest there may not be enough data before September to support a cut.

“We have made no decisions about September,” Powell said.

Major U.S. indexes, which had been trading slightly higher Wednesday, went negative after Powell’s comments.

Trump argues that because the U.S. economy is doing well, rates should be lowered. But unlike a blue-chip company that usually pays lower rates than a troubled start-up, the Fed adjusts rates to either slow or speed growth, and would be more likely to keep them high if the economy is strong to prevent an inflationary outbreak.

Earlier Wednesday, the government said the economy expanded at a healthy three per cent annual rate in the second quarter, though that figure followed a negative reading for the first three months of the year, when the economy shrank 0.5 per cent at an annual rate. Most economists averaged the two figures to get a growth rate of about 1.2 per cent for the first half of this year.

Some of the disagreement likely reflects jockeying to replace Powell, whose term ends in May 2026. Waller in particular has been mentioned as a potential future Fed chair.

Bowman, meanwhile, last dissented in September 2024, when the Fed cut its key rate by a half-point. She said she preferred a quarter point cut instead, and cited the fact that inflation was still above 2.5 per cent as a reason for caution.

Waller also said earlier this month that he favored cutting rates, but for very different reasons than Trump has cited: Waller thinks that growth and hiring are slowing, and that the Fed should reduce borrowing costs to forestall a weaker economy and a rise in unemployment.

There are other camps on the Fed’s 19-member rate-setting committee (only 12 of the 19 actually vote on rate decisions). In June, seven members signaled that they supported leaving rates unchanged through the end of this year, while two suggested they preferred a single rate cut this year. The other half supported more reductions, with eight officials backing two cuts, and two — widely thought to be Waller and Bowman — supporting three reductions.

The dissents could be a preview of what might happen after Powell steps down, if President Donald Trump appoints a replacement who pushes for the much lower interest rates the White House desires. Other Fed officials could push back if a future chair sought to cut rates by more than economic conditions would otherwise support.

Overall, the committee’s quarterly forecasts in June suggested the Fed would cut twice this year. There are only three more Fed policy meetings — in September, October, and December.

When the Fed cuts its rate, it often — but not always — results in lower borrowing costs for mortgages, auto loans and credit cards.

Some economists agree with Waller’s concerns about the job market. Excluding government hiring, the economy added just 74,000 jobs in June, with most of those gains occurring in health care.

“We are in a much slower job hiring backdrop than most people appreciate,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income.

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Michael Feroli, an economist at JPMorgan Chase, said in a note to clients this week if the pair were to dissent, “it would say more about auditioning for the Fed chair appointment than about economic conditions.”

The Fed’s two-day meeting comes after a week of extraordinary interactions with the Trump White House, which has accused Powell of mismanaging an extensive, US$2.5 billion renovation of two office buildings. Trump suggested two weeks ago that the rising cost for the project could be a “firing offense” but has since backed off that characterization.

Notably, Trump argues that the Fed should cut because the economy is doing very well, which is a different viewpoint than nearly all economists, who say that a healthy, growing economy doesn’t need rate cuts.

“If your economy is hot, you’re supposed to have higher short-term rates,” Porcelli said.

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Christopher Rugaber, The Associated Press