The Federal Reserve announced Wednesday 30 July that it leaves its benchmark interest unchanged, with a range of 4.25% to 4.5%. The decision is extremely foolish.
By keeping rates at a relatively high level, compared to the average rate in the past two decades, the FED suppresses unnecessary economic growth and makes it more difficult for consumers and companies to finance debts. Moreover, the unemployment rate rose to 4.2%in July, which marked an increase in June and underlines that the labor market is cooling and the economy must be supported.
The federal fund presentation rate – the interest rate against which the storage institutions give to each other at night – is a powerful tool that is used by the Federal Reserve to influence US economic activity. Changes in this rate ripple in the entire economy that influence the loan costs, consumer behavior and, ultimately, the wider cycle cycle.
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Higher rates mean that it becomes more expensive for banks to borrow money at night. These costs are often passed on to consumers and companies through higher interest rates on loans and credit.
Critics call Federal Reserve chairman Jerome Powell for not reducing interest rates. File: Powell testifies during a hearing of the Huis Oversight and Reform Select Subcommittee about the Coronavirus Crisis, on Capitol Hill in Washington, 22 June 2021. (Graeme Jennings/Pole via Reuters)
When the Fed lowers the funds, borrowing becomes cheaper and generally stimulates more economic activity.
Most analysts believe that the Federal Reserve decision to uphold the interest rates, compared to the average rate in the past 15 years, is driven by fear. FED chairman Jerome Powell and some of the other leaders of the central bank say that if they lower interest rates, inflation will increase, which will already increase high costs for goods and services in the economy.
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However, the best proof tells a completely different story.
No inflation crisis
First of all there is currently no inflation crisis.
The Bureau of Labor Statistics reported in July that the consumer price index – one of the most popular inflation measures – has increased by 2.7% in June compared to a year earlier.
Although the CPI was slightly higher in June than the CPI registered in May (2.4%), both months remained registered below the levels in December 2024 (2.9%) and January 2025 (3%). Moreover, inflation is considerably coordinated from where it was during a large part of Joe Biden’s presidency.
Inflation and interest rates
Secondly, historical data and recent experience show that the vision of the FED for inflation and interest rates is completely misled. The benchmark percentage of the FED is not an important factor in causing or preventing inflation.
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During the eight years in function of President Barack Obama, for example, the benchmark interest of the FED was extremely low, consistently less than 1%. Yet inflation was also extremely low, even in the years in which the economy added a considerable number of jobs.
Most analysts believe that the Federal Reserve decision to uphold the interest rates, compared to the average rate in the past 15 years, is driven by fear.
In particular, during the first term of President Donald Trump, the Federal Reserve increased the interest rates considerably – although not nearly as high as now – and inflation remained relatively the same as under many Obama’s term of office.
These are no exceptions to the rule. An overview of data in the past half century shows that there is no strong correlation between the interest rate and the inflation of the FED.
Federal Reserve leaves interest rates unchanged
That does not mean that the interest rates are not relevant, or that they should be on or almost zero. Rentet rates for a long period of time can cause significantly unintended consequences, such as encouraging an increase in public and private debts. But the idea that Powell and his friends with the Fed are holding off an inflation crisis by keeping the rates high is delusions.
Everything that the FED achieves by refusing to lower the rates – even with only half a percentage point – makes it more expensive for everyone to finance debts. This has enormous economic implications, especially for companies that want to expand and families who want to buy or sell a house, car or another expensive item.
The Federal Reserve did not deal with former President Joe Biden and the economies of President Trump. (Getty Images)
The decision of the Fed to uphold the rates is to prevent the US economy from having no flowering.
What causes inflation?
If the benchmark interest of the FED is not the most important factor in considering inflation, what is then? The answer is, it all depends on the circumstances.
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Inflation occurs when the prices of goods and services in the economy increase, so that your money is worth less than before. A common cause is when people spend a lot and the demand for things such as food, housing or cars increases faster than companies can deliver them. When this happens, companies often increase prices because they know that customers are willing to pay more.
Another cause is when it becomes more expensive for companies to produce goods. If wages rise, raw materials costs more, or energy becomes more expensive, companies can pass on extra costs to consumers by increasing prices.
Inflation can also occur when there is a large increase in the amount of money circulating in the economy. If the government prints a lot of money or spends strongly without matching the production, the value of the money can fall. When every dollar buys less than before, prices rise to make the difference.
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All these things took place during BIDEN presidents. Biden and his democratic allies in the congress have issued obscene amounts, policy that was imposed that energy prices were shot up, increased legal burdens for companies and discouraged people by adding millions to government programs.
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In addition, COVID-19 Lockdowns, the Russian War in Ukraine and instability in the Middle East have seriously influenced the supply chains, which increased the prices on a long list of goods and services.
But now the lockdowns are over, supply chains and markets have adapted to recent international unrest, investments in America are on the rise and people are back to work.
The decision of the Fed to uphold the rates is to prevent the US economy from having no flowering.
There is simply no reason to assume that a modest interest rate reduction would ensure that inflation is dramatic or not at all.
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Why are Powell and the other Fed governors than keeping rates higher than necessary? Maybe it’s because they don’t like the president. Or maybe it’s because they don’t understand what really causes inflation.
Anyway, it seems clear that a change in leadership is desperately needed at the US Central Bank.
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