WASHINGTON (AP) — The Federal Reserve is expected to leave its short-term interest rate unchanged on Wednesday for the fifth straight meeting, a move that will likely underscore the deep divide between how Chair Jerome Powell and his chief critic, President Donald Trump, see the economy.
The Fed itself, to be sure, is increasingly divided over its next steps, and many economists expect that two members of the Fed's governing board — both appointed by Trump — could dissent on Wednesday in favor of cutting rates. If so, that would be the first time two governors vote against the chair since 1993.
Even so, the gap between the views of the Fed's interest-rate setting committee, chaired by Powell, and the White House is unusually large. In several areas, Trump's views sharply contrast with that of the Fed's leadership, setting up likely clashes for years to come, even after Powell's term as chair ends in May 2026.
For example, Trump says that because the U.S. economy is doing well, the Fed should cut rates, as if the U.S. is a blue-chip company that should pay less to borrow than a risky start-up.
But Fed officials — and nearly all economists — see it the other way: A solid economy means rates should be relatively high, to prevent overheating and a burst of inflation.
“I’d argue that our interest rates are higher because our economy’s doing fairly well, not in spite of it,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.
Trump argues that the Fed in general and Powell in particular are costing U.S. taxpayers hundreds of billions of dollars in interest payments by not reducing borrowing costs. Yet Fed officials don't think it's their job to reduce rates the government pays on Treasury notes and bonds.
Most economists worry that if they did, they would risk failing at one of the key jobs Congress gave them: fighting inflation.
“It’s using monetary policy to ease pressure on fiscal policymakers, and that way points to higher inflation and bigger problems down the road," said William English, an economist at the Yale School of Management and former senior Fed staffer.
If financial markets see that the Fed is focused on keeping borrowing costs low to help the government — rather than focusing on its congressionally-mandated goals of stable prices and maximum employment — Wall Street investors, worried about future inflation, will likely demand higher interest rates to hold Treasury bonds, economists say, pushing up borrowing costs across the economy.
For his part, Trump says there is “no inflation” and so the Fed should reduce its short-term rate, currently at about 4.3%, which was ramped up in 2022 and 2023 to fight rising prices. The Fed’s rate often — but not always — influences longer-term borrowing costs for mortgages, car loans, and credit cards.
Inflation has fallen sharply and as a result Fed officials have signaled they will cut rates by as much as a half-percentage point this year. Yet it has picked up a bit in the last two months and many of those policymakers, including Powell, still want to make sure that tariffs aren't going to lift inflation much higher before they make a move.
Inflation accelerated to 2.7% in June from 2.4% in May, the government said earlier this month, above the Fed's 2% target. Core prices, which exclude the volatile food and energy categories, rose to 2.9% from 2.8%.
Last week, Trump and several White House officials ramped up their attacks on Powell over rates. They also criticized the ballooning costs of the Fed's renovation of two of its buildings, raising questions over whether the president was looking to fire Powell for cause rather than policy differences.
Trump and Powell engaged in an extraordinary on-camera confrontation over the cost of the project during Trump's visit to the building site last Thursday. On Monday, Trump was more restrained in his comments on the Fed during a joint appearance in London with British Prime Minister Keir Starmer.
"I’m not going to say anything bad,” Trump said. “We’re doing so well, even without the rate cut.”
But he added, “a smart person would cut."
Some economists expect that the Fed will reduce its key rate by a quarter-point in September, rather than July, and say that the two-month delay will make little difference to the economy.
Yet beyond just the timing of the first cut, there is still a huge gulf between what Trump wants and what the Fed will even consider doing: Fed officials in June penciled in just two reductions this year and one in 2026. They forecast that their key rate will still be 3.6% at the end of next year. Trump is pushing them to cut it to just 1%.
“That's not going to happen with anything like the current people on the committee,” English said.
Wall Street investors also expect relatively few cuts: Two this year and two in 2026, according to futures pricing tracked by CME's Fedwatch.
According to the Fed's projections, just two officials in June supported three cuts this year, likely Trump's appointments from his first term: governors Christopher Waller and Michelle Bowman.
Waller gave a speech earlier this month supporting a rate reduction in July, but for a very different reason than Trump: He is worried the economy is faltering.
“The economy is still growing, but its momentum has slowed significantly, and the risks” of rising unemployment “have increased,” Waller said.
Waller has also emphasized that tariffs will create just a one-time bump in prices but won't lead to ongoing inflation.
Yet most Fed officials see the job market as relatively healthy — with unemployment at a low 4.1% — and that as a result, they can take time to make sure that's how everything plays out.
“Continued overall solid economic conditions enable the Fed to take the time to carefully assess the wide range of incoming data,” said Susan Collins, president of the Boston Federal Reserve. “Thus, in my view, an ‘actively patient’ approach to monetary policy remains appropriate at this time.”
Christopher Rugaber, The Associated Press
