An economist believes the Federal Reserve may choose to raise interest rates to address stubborn inflation, despite many forecasting a cut and pressure for this from President Donald Trump.
“The unemployment rate is low but the rate of inflation is somewhat elevated,” William Silber wrote in a recent article for The Wall Street Journal. “That suggests, if anything, the target interest rate should be higher to push down inflation.”
Why It Matters
Since the beginning of his second term, Trump and many in his administration have been pushing for a major rate cut to stimulate economic growth and reduce the U.S.’s debt payments. Much of this pressure has been directed at the central bank’s chair, Jerome Powell, whom Trump has routinely criticized and called “too late Powell,” a “stupid person” and a “Trump Hater.”
The president has floated the possibility of replacing Powell with someone whose views on monetary policy more closely align with his own, though both he and the administration maintain that there are no imminent plans to do so.
What To Know
The Federal Open Market Committee (FOMC), the body tasked with setting monetary policy, has not cut interest rates since December. The Fed has held the target range at 4.25 to 4.50 percent, remaining in a “wait and see” mode absent greater clarity on the trajectory of inflation and the effects of Trump’s tariffs on the economy.
In a statement following the most recent FOMC meeting in June, the Fed said, “The unemployment rate remains low, and labor market conditions remain solid.”
Unemployment dropped to 4.1 percent in June, according to Labor Department data, down from 4.2 percent in May and the forecast increase of 4.3 percent.
However, the Fed’s “dual mandate” is to promote both maximum employment and stable prices, and it acknowledged in the same statement that inflation remains elevated. Per the most recent Consumer Price Index, the annual inflation rate increased to 2.7 percent in June from 2.4 percent in May.
According to Silber, this persistently high inflation creates a mystery of why no Fed officials have suggested raising borrowing costs—which slows spending and investment—to bring inflation closer to the central bank’s long-term 2 percent target.
Silber told Newsweek that given the “full employment” the U.S. is enjoying, he did not see “any reason” for the Fed to cut rates until inflation fell below this target.
“Right now inflation is above 2 percent—never mind that it has declined. … That’s history,” he added. “The target rate should be higher by at least 25 basis points.”
Michael Pearce, the deputy chief U.S. economist at Oxford Economics, told Newsweek that the chances of the Fed raising rates at its next meeting or this year are “slim to none.”
Christopher Waller and Michelle Bowman, both Trump appointees to the Fed’s Board of Governors, have already voiced their support for a rate cut. Waller told Bloomberg TV earlier this month that the labor market may be weaker than people believe, his justification for more stimulative monetary policy. Bowman, meanwhile, said last month that the inflationary effects of tariffs “may take longer, be more delayed, and have a smaller effect than initially expected.”
Trump has called on the Fed to cut rates by several points, which he believes could save the federal government up to $900 billion in annual debt payments.
Economists who previously spoke with Newsweek anticipated the Fed cutting rates by the end of the year at the latest, though some said tariffs and the potential effects of the One Big Beautiful Bill Act could push the Fed to maintain its “wait and see” stance.
What People Are Saying
William Silber wrote in The Wall Street Journal: “No one on the FOMC knows precisely the appropriate interest rate needed for price stability and maximum employment. And neither does any Nobel Prize-winning economist. The so-called neutral rate of interest is observed in hindsight—by whether the economy is expanding fast enough to keep unemployment low but not too fast to provoke higher inflation. By that measure, the current target interest rate of 4.25 percent to 4.50 percent seems about right.”
Michael Pearce, the deputy chief U.S. economist at Oxford Economics, told Newsweek: “We have an economy where unemployment looks about right, and core inflation is running a little hot—somewhere between a half and a full point above 2 percent. Most policy rules would suggest we want rates slightly restrictive—and moving down closer to neutral as the inflation risk fades.
“There is always uncertainty about the Goldilocks level of interest rates—not too hot to stoke inflation, not too cold to drive up unemployment. I disagree that neutral rates are that high—my best guess is neutral is somewhere in the low threes.”
What Happens Next
The FOMC is scheduled to meet on Tuesday and Wednesday and announce its interest rate decision.
According to the minutes of its June meeting, “a couple” of policymakers were open to cutting rates at the upcoming meeting, while others argued that the Fed could hold off until the end of 2025, based on both “elevated short-term inflation expectations” and belief that the economy can “remain resilient.”
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