What’s the Outlook for the Federal Reserve’s Interest-rate Policy?

The Fed Remains Divided The Fed remains divided not least because of heightened political pressure and growing calls to change the inflation objective, which would facilitate the deep interest-rate cuts that the White House is seeking. Some Federal Open Market Committee members are voting as if the inflation target were already 3% rather than 2%, while others stress that inflation has stayed above a long-held 2% official goal for more than four years, so premature rate cuts could further de-anchor inflation expectations (Figure 1).

More increases in US trade tariffs and broader price pressures emphasize the need for caution. Persistent political interference could undermine the independence of the Fed and credibility regarding price stability, thereby eroding the confidence of capital markets.

The US economy has been growing resiliently, raising some questions about how long the softer labor market data will last. The lack of official data during the current government shutdown also complicates decision making, encouraging policymakers to maintain the course they laid out during September in the absence of much further information.

Figure 1. US inflation remains well above the official target

US headline consumer price index, % year on year