CICC: The Federal Reserve will not cut interest rates due to pressure from Trump

According to the Zhitong Finance APP, CICC published a research report stating that the Federal Reserve's decision to maintain interest rates in September was in line with market expectations. Two board members opposed keeping rates unchanged, but Powell and most officials leaned towards maintaining a tight stance: they believe that the inflation risks brought by tariffs have not yet been resolved, and the labor market remains solid, thus there are no conditions for rate cuts. Powell also emphasized the independence of the Federal Reserve, suggesting that it would not yield to political pressure. CICC believes that the inflation effects of tariffs will further manifest in the coming months, making it difficult for the Federal Reserve to cut rates in September; if Trump continues to escalate tariffs, the timing of rate cuts may be delayed. Regarding Trump's pressure to demand rate cuts, CICC believes that the market underestimates the Federal Reserve's determination to maintain its independence. The interest rate decision is made collectively by 12 voting members, and even if Trump were to dismiss Powell, it would be difficult to change the direction of monetary policy.

CICC's specific views are as follows:

This meeting released several signals: First, there are internal disagreements within the Federal Reserve regarding policy direction. Board members Waller and Bowman voted against maintaining interest rates unchanged, marking the first time since 1993 that two board members opposed the Federal Reserve's collective decision in the same meeting. Both believe that the labor market is showing signs of weakness and that rates should be moderately lowered to prevent risk expansion. Powell stated after the meeting that the views of the two were fully discussed, and he himself acknowledged that there are certain downward risks in the job market that need to be closely monitored in the future.

Second, Powell and most officials tend to maintain a tight stance. Powell pointed out that based on the experience from Trump's first term, the inflation effects of tariffs may not be immediate but often gradually manifest over several months, with costs ultimately borne by American businesses and consumers. In the recently released June CPI inflation data, some imported goods have already shown signs of price increases. He also emphasized that although most officials believe that the inflation caused by tariffs is temporary and does not require rate hikes in response, this does not mean that rate cuts should be used to offset it. This statement fully reflects that most officials of the Federal Reserve wish to continue maintaining a tight stance.

However, Powell also acknowledged that the current monetary policy is moderately restrictive, which puts downward pressure on the labor market. He mentioned that although the U.S. GDP growth rate rebounded in the second quarter, the internal demand indicators weakened, and real estate investment was sluggish, indicating that economic momentum has weakened. However, he believes that these factors are still insufficient to constitute adequate conditions for rate cuts, and the Federal Reserve needs to remain patient and wait for clearer inflation data.

Third, the Federal Reserve is resolutely maintaining its independence. Previously, Trump repeatedly pressured the Federal Reserve to cut rates, even threatening to dismiss Powell. In response, Powell stated that the Federal Reserve would not adjust its rate path due to political pressure, and the goals of monetary policy are to achieve full employment and stable inflation, which do not include helping the government reduce debt costs. He also emphasized that the independence of the Federal Reserve, as an institutional arrangement, aims to ensure that it always serves the public interest, and as long as maintaining independence helps achieve this goal, it should be continued and respected. The Federal Reserve does not agree with political interference, which has also received broad support at the congressional level. From Powell's remarks, it is clear that the Federal Reserve is firm in defending its independence and has not been swayed by political interference Based on the above signals, CICC believes that the Federal Reserve is not yet ready to cut interest rates. When to cut rates in the future depends on the trend of inflation. In its mid-term outlook report, CICC predicts that U.S. inflation may experience an upward trend in the second half of the year, but unlike the inflation driven by overheated economic demand in 2021-2022, this round of increase is mainly driven by tariffs and is considered a one-time, structural shock ("U.S. Macroeconomic Outlook for the Second Half of 2025: American-style Rebalancing"). Therefore, the Federal Reserve may choose to hold steady and wait until the peak of inflation has passed before taking easing measures. Based on this judgment and Trump's latest tariff policy, CICC believes that it may be difficult for the Federal Reserve to cut rates in September. If Trump decides to significantly raise tariffs after the expiration on August 1, it will exacerbate inflationary pressures, and the timing of the Federal Reserve's rate cut may be further delayed.

In the medium term, as U.S. fiscal policy remains relatively loose, both economic growth and inflation stickiness will be enhanced. In an environment of fiscal easing, monetary policy may remain relatively tight for a longer period. The Federal Reserve will shift from being the "main character" to a "supporting role," and the focus of monetary policy will shift from "anti-deflation" to "inflation prevention." This does not mean that the Federal Reserve cannot cut rates, but rather that the space for rate cuts is limited, and it is difficult for policy rates to return to the low levels seen before the pandemic.

Regarding Trump's pressure to cut rates, CICC believes that the market may underestimate the Federal Reserve's determination to maintain its independence. The current institutional arrangement of the Federal Reserve is not the result of a day’s work but has been gradually formed through more than a century of practice and adjustment, having undergone significant tests such as the fiscal and monetary coordination during World War I and II, the separation of "fiscal-central bank" functions after the war, the stagflation shock of the 1970s, the 2008 global financial crisis, and the COVID-19 pandemic in 2020, accumulating profound policy experience. Federal Reserve officials are well aware that their independence is crucial to the U.S. economy and financial markets, and therefore will strive to maintain it, making it unlikely that they will completely follow the president's orders. Furthermore, according to the current institutional arrangement, monetary policy is jointly decided by the 12 voting members of the Federal Open Market Committee (FOMC) on a "one person, one vote" basis, with the chair having no extra voting power. This means that even if Trump were to dismiss Powell, it would be difficult to sway the collective will of the voting members and change the direction of monetary policy.

Chart 1: Comparison of Federal Reserve Monetary Policy Statements (July 2025 vs. June 2025)

Source: Federal Reserve, CICC Research Department