By Michael S. Derby
NEW YORK (Reuters) -U.S. Federal Reserve Chair Jerome Powell on Wednesday said there is no place for the central bank to consider government financing needs when setting interest rate policy.
“We have a mandate” from Congress, and that is to keep inflation in check and the job market as strong as it can be, Powell said in a press conference following the latest Federal Open Market Committee meeting.
Given that legal charge, “we don’t consider the fiscal needs of the federal government. No advanced economy central bank does that, and it wouldn’t be good” for the Fed to do so as it would compromise its credibility.
Most economists agree that a central bank that sets interest rates to keep government borrowing costs low is a central bank that will likely lose control of inflation and will be unable to act with the independence needed to keep price pressures in check.
Powell spoke to reporters after a Fed policy meeting that saw officials maintain their overnight interest rate target range steady at 4.25% to 4.5%. Officials are continuing to weigh data to see how big changes in government import taxes are affecting the economy, as financial markets continue to eye a possible September easing in short-term borrowing costs.
The Fed has faced steady and often aggressive pressure from President Donald Trump to cut rates. The president has said a large move down in rates is justified by a number of factors, but part of his critique centers on the elevated interest costs now faced by the government as it sells bonds to cover oceans of red ink.
Fed rates, even after cuts last year, still remain relatively high relative to where they’ve been in recent years. At $1.1 trillion in interest rate payments last year, the cost of managing government debt has more than doubled since before the COVID-19 pandemic, and that’s in large part driven by the high rates the Fed has in place to cool inflation levels.
But if the Fed were to cut rates to 1% now, a level Trump has argued for, it would run the risk that inflation pressures, already likely to go up due to trade tariffs, would rise even more given newly stimulative policy. That could in turn backfire on government borrowing as it would likely send bond yields up, meaning the government would have to pay higher rates to secure investors.
In years past, the Fed has also faced some heat from critics who believed it was keeping rates low to make government deficit spending easier, a notion regularly rejected by central bankers.
The issue of interest rate costs could continue to nip at the central bank as a recent Republican taxation and spending bill is expected to increase government borrowing, which could further increase how much the government has to pay to get the public to buy those bonds.
(Reporting by Michael S. Derby; Editing by Andrea Ricci)
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