Federal Reserve officials are gathering on Tuesday and Wednesday for a crucial meeting amid extraordinary conditions. On Wednesday, following their two-day policy meeting, central bankers are anticipated to declare their first interest rate reduction since December to bolster the slowing labor market in the United States, with the expectation that President Donald Trump’s extensive tariffs may have a minimal effect on inflation. However, a significant issue looms as officials engage in discussions regarding the US economy: Trump’s assertive initiative to alter the leadership of the Fed.
On Monday, the Senate confirmed Stephen Miran, who served as Trump’s top economic adviser, to the Fed’s Board of Governors for a vacated term set to expire at the end of January, with the possibility of extension. Miran has indicated that he will not agree to resign at the conclusion of his term if a permanent successor has not been appointed. Following the oath taken on Tuesday morning, Miran is now positioned to participate in the voting process at this week’s Federal Reserve policy meeting. Stephen Miran participates in a nomination hearing held by the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill on September 4. Lisa Cook provided testimony during a hearing in June 2023. Fed Governor Lisa Cook, will also participate in the voting at this week’s meeting. An appeals court on Monday denied Trump’s effort to dismiss Cook as her lawsuit contesting Trump’s removal order progresses. Cook represents the inaugural instance of a Federal Reserve governor facing an attempt at dismissal.
The recent Federal Reserve meeting is remarkable, not only due to the central bankers’ shift in their approach to interest rates but also because of the recent events involving the influential board of the Fed. This occurs amidst ongoing pressure from the Trump administration on the politically autonomous central bank. The increasing indications of labor market deterioration are a primary factor behind the Fed’s decision to reduce borrowing costs for the first time in nine months, alongside the rising conviction among Fed officials that tariff-related inflation might be temporary. Job growth during the summer was lackluster, employers added an average of approximately 29,000 jobs in the three months ending in August. This figure is slightly higher than July’s average, which marked the weakest three-month pace since 2010, excluding the pandemic period. The current labor market shows a concerning trend, with more individuals actively seeking employment than available job openings. Additionally, new claims for unemployment benefits for the week ending September 6 have surged to their highest point in almost four years. Furthermore, in August, the count of individuals unemployed for over 26 weeks hit its peak since November 2021.
A preliminary benchmark revision to employment data for the year ending in March, released last week, showed that the US labor market was on even shakier ground than previously thought heading into the summer. During a prominent speech in late August, Fed Chair Jerome Powell established the foundation for this week’s rate cut, indicating that “downside risks to employment are rising.” In recent weeks, other Fed officials have reiterated those concerns, initially highlighted by Fed governors Christopher Waller and Michelle Bowman, both appointed by Trump, who supported a rate cut in July. The upcoming economic projections from Fed officials, set to be unveiled on Wednesday, will indicate the potential pace at which the central bank may reduce rates in the near future, given the current fragility of the labor market. Inflation has gradually increased in recent months — primarily as a result of Trump’s extensive policies, including his tariffs — yet Fed officials have become more receptive to the notion that any rise in inflation could be short-lived. The Consumer Price Index increased by 2.9% in August compared to the same month last year, as reported by the Labor Department last week, aligning with economists’ forecasts. For several months, consumer inflation metrics have largely aligned with projections, even amidst the tumultuous implementation of Trump’s tariffs.
Mary Daly, stated in a recent social media update that “tariff-related price increases will be a one-off.” In a recent speech, St. Louis Fed President Alberto Musalem indicated that he anticipates “the effects of tariffs will work through the economy over the next two to three quarters and the impact on inflation will fade after that.” As the labor market shows signs of weakening and economic uncertainties linger, businesses find themselves with diminished capacity to increase prices, a stark contrast to the post-pandemic period characterized by high labor demand and consumers benefiting from substantial stimulus payments and enhanced savings. “Inflation has increased since the first quarter, but these numbers include the effects of import tariff increases, which, with inflation expectations anchored, I continue to expect will only temporarily raise inflation,” Waller stated. “Most forecasts indicate that 12-month inflation is expected to gradually rise for a few more months, with the impact of monthly tariffs diminishing by early 2026,” he added.
As Federal Reserve officials endeavor to decipher a complex economic landscape, the Trump administration persists in exerting pressure on the traditionally autonomous Fed. Since the onset of his second term, Trump has consistently and openly criticized Powell and the Federal Reserve due to the lack of interest rate reductions this year. Federal Reserve policymakers have refrained from implementing rate cuts until this week, as they aimed to assess the implications of Trump’s policies and their effects. Earlier this year, Trump issued a threat to dismiss Powell; however, he ultimately reconsidered after receiving counsel from his advisers, who cautioned that such an action might trigger significant volatility in the financial markets. In July, the Trump administration capitalized on the Federal Reserve’s ongoing $2.5 billion renovation of its headquarters in Washington, DC, using it as a justification to dismiss Powell, alleging mismanagement. At one point, Trump and Powell publicly feuded over the total cost of the project.
Currently, Trump is attempting to remove Cook, referencing accusations of mortgage fraud that are under active investigation by the Justice Department. The courts have decided to allow Cook to remain in her position as her lawsuit contesting Trump’s efforts to remove her progresses through the legal system. Recent documents disclosed by the Associated Press indicate that Cook’s Atlanta condo, which the administration claims is one of two properties she identified as a primary residence, has been classified as a vacation home. Cook has refuted any allegations of misconduct. As Cook’s status hangs in uncertainty, the recent confirmation of Fed governor Miran has raised apprehensions among Democrats regarding his strong connections with the president. For his part, Miran has said he will abide by ethics rules and federal law, and form independent opinions about the economy. “I’m very independently minded, as shown by my willingness to stray from consensus and have out-of-consensus views, and I believe that I will continue to be as independent in my thinking process, if confirmed,” Miran stated during his confirmation hearing.
Trump has expressed a desire for a Republican majority on the Fed’s Board of Governors, and Miran’s confirmation process was expedited, taking approximately one month from nomination to swearing in. The duration of the process generally spans a few months. Trump’s push for lower rates likely accelerated that timeline to ensure Miran’s appointment to the Fed’s board before the September meeting. Market observers are largely anticipating that the Fed will declare a minimum quarter-point reduction at the end of the meeting, regardless of Miran’s presence.