The Federal Reserve’s Federal Open Market Committee (FOMC) announced on July 30 that it would keep interest rates steady, despite criticism from President Donald Trump.
To assess where U.S. monetary policy may be headed next, Columbia Business Insights spoke with Brett House, Professor of Professional Practice in the School’s Economics Division.
House dissected the Fed’s current stance and Trump’s critiques of Fed Chair Jerome Powell and explained why political intervention in the Fed’s independence would be “a slowly moving disaster.”
CBS: Despite encouragement to cut from many quarters, the FOMC has kept its target for the federal funds rate on hold so far in 2025. Why hasn’t the FOMC cut rates?
The U.S. economy started this year in good form: the January Wall Street Journal survey of leading economic forecasters put the probability of a recession in 2025 at its lowest level in three years. Manufacturing output ended 2024 at an all-time high and investment in the manufacturing sector was on a three-year tear. The American economy was already pretty great.
The Fed hasn’t cut its target for the federal funds rate, its key policy rate, because it’s not clear that a reduction would be consistent with Congress’ mandate to the central bank to maximize employment, keep inflation low, and maintain moderate long-term interest rates. Although economy-wide growth and its leading driver, consumer demand, have both softened over the first half of 2025, they have remained stronger than expected amongst truly unprecedented levels of policy-related volatility and uncertainty. The first quarter of 2025 did see the largest quarterly decline in U.S. corporate profits since the end of 2020, but equity markets have rebounded from April’s tariff-induced sell-off and have hit new highs.
Macro indicators underscore the U.S. economy’s surprising resilience in the face of policy-induced upheavals. The unemployment rate in June remained at a modest 4.1%, not far above the 54-year low of 3.4% recorded in April 2023. Headline inflation was 2.7% year-on-year in June, still stubbornly above the Fed’s 2% average target.
The first two prongs of the Fed’s mandate aren’t calling for a cut.
In fact, the Fed’s real policy rate—the 4.33% midpoint of the current target range for the fed funds rate less inflation expectations, which are currently at 3%—is nearly dead-on the NY Fed’s 1.37% estimate of the natural rate of interest. This implies that monetary policy is close to neutral: neither stoking more economic activity nor crimping it.
CBS: Is the FOMC costing the U.S. government trillions of dollars, as President Trump has asserted?
Keeping a lid on the U.S. federal government’s borrowing costs isn’t part of the Fed’s mandate. In fact, it would be terrible for the American economy if it were added to the Fed’s remit. From Argentina to Zimbabwe, we have ample proof that when central banks are compelled to keep interest rates low for high-spending governments, there are terrible results for households, businesses, and markets that take decades to fix.
At roughly 4.3%, the yield on U.S. government 10-year bonds is more or less where it’s been since late 2022. The U.S. Treasury faces similar borrowing costs to those that prevailed during the second half of the Biden administration.
Rather than cajoling the Fed to lower short-term policy rates, there is a much more direct way to bring down the U.S. government’s borrowing costs: issue less debt.
CBS: Are high interest rates making it harder for American households and businesses to get ahead?
Americans face a number of economic challenges. Labor markets have cooled: compared with a couple years ago, there are half as many job postings for every job seeker. Changes in U.S. immigration policies are reducing the ranks of workers and, rather than opening up new opportunities for Americans, this is dampening economic activity. Reduced tourism inflows are also denting growth.
President Trump’s One Big Beautiful Bill Act (OBBA) won’t provide much relief. While the extension of tax cuts from Trump’s first term alleviates some uncertainty that has weighed on business investment, the OBBA doesn’t provide much stimulus to the economy since its benefits are concentrated on the well-off and big companies.
For everyone else, wage gains are slowing at the same time that budgets are squeezed by prices that remain, on average, 25% higher than at the onset of the COVID-19 pandemic. Inflation shows signs of accelerating now that tariffs are beginning to get passed through to the price tags on U.S. store shelves.
If the Fed were to cut its short-term rates under these conditions, it’s not clear that the cost of mortgage financing would go down. Mortgage rates are benchmarked off of 10-year U.S. Treasury yields, and these would go up as inflation concerns mount.
CBS: Should we expect the FOMC to lower the Fed’s key policy rates at any point in the remainder of 2025?
I don’t think we will—or should—see a cut in the target range for the federal funds rate this year. None of the three parts of the Fed’s mandate would be more clearly fulfilled if policy rates were lower. We are only just starting to see the impact of tariffs on inflation and, while policy uncertainty is hurting growth and jobs, this uncertainty would only be enhanced by cutting interest rates amidst record peacetime fiscal deficits.
But I’m an outlier with this view.
In the projections released with its June 18 rate decision, the FOMC itself anticipated two cuts this year. We don’t get updated projections from the Committee until its September 17 decision. But, in a break with decades of precedent, two Fed governors, Christopher Waller and Michelle Bowman, dissented from the July 30th majority and voted for a quarter-point cut. Markets remain priced for at least one cut this year, and the consensus of economic forecasters still anticipates a reduction in the fed funds rate in 2025.
CBS: If President Trump were to fire or replace Fed Chair Powell, what would the implications be?
Further meddling with the Fed’s independence would be a slow-moving disaster. Such a move would roil financial markets, reduce faith in the stability of U.S. institutions, push up inflation expectations, raise U.S. Treasury yields, and make it more expensive for Americans to borrow at longer maturities. That would make it harder—not easier—for Chair Powell’s successor to deliver the lower short-term policy rates President Trump wants.
