Powell refuses to toe the Trump line, India stay guarded

 The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) maintained its policy rates at 4.25% to 4.5% range, by a majority vote. It was the first occasion since 1993 when two Fed governors voted against the majority decision. Fed governors, Michelle Bowman and Christopher Waller, wanted a 25bps rate cut at the meeting, concluded on Wednesday.

The majority decision of the Fed to not cut rates is apparently against the wishes and open demand for a rather drastic cut in the Fed policy rates by the US administration, especially President Trump.

Strong April-June quarter GDP data and July private payroll data perhaps weighed on the Fed decision. The Commerce Department’s advance gross domestic product (GDP) report on Wednesday showed growth of 3.0% for the April to June period, above the 2.5% growth expected. US GDP shrank by 0.5% in the January-March 2025 quarter. U.S. private payrolls also increased more than expected July, rising by 104,000 jobs in July 2025 after a revised 23,000 decline in June.

Powell stays defiant

The Fed chairman Jerome Powell stayed defiant, not showing any sign of conforming to the political wishes and sticking to his mandate of keeping the prices under control and making employment conditions strong. In the post meeting conference Powell emphasized that there is no place for the central bank to consider government financing needs when setting interest rate policy. He said, “we don't consider the fiscal needs of the federal government. No advanced economy central bank does that, and it wouldn't be good”. Further adding that “it wouldn't be good for the Fed to do so as it would compromise its credibility”.

Important to note that the Fed has faced aggressive pressure from President Trump to cut rates. Trump has been claiming that said a large move down in rates (300bps) is justified by several factors, including stable inflation and improving fiscal conditions. At $1.1 trillion in interest rate payments last year, the cost of managing government debt has more than doubled since 2020 and that’s in some part driven by the high rates the Fed has in place to cool inflation levels.

Trade policy impact, a key variable

While the market participants agreed that it is important for the central bank to maintain its autonomy and make policy decisions on the basis of available and expected data, in order to effectively keep the prices under check.

Though Fed officials said that they “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”, Chairman Powell suggested that he would like to wait for more data on impact of trade policy on prices, before taking any decision on rate cuts. Powell said the central bank has “made no decisions” about a potential policy change in September. He added, “Higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen.”

The US administration is pursuing a volatile and aggressive trade policy, in order to reset the terms of trade with its trade partners. It is still far from clear how the situation will finally appear once all trade related issues are settled. While the President has claimed that many trade deals, including with the EU, have been signed and the US is already on course to collect more than US$300bn in additional import duties this fiscal, reports suggest that a fresh round of trade negotiations in Sweden between the U.S. and China failed to result in a major breakthrough following two days of talks. Vietnam has also denied signing any trade deal with the US, as claimed by the president.

On Wednesday, Trump also announced that the United States will impose a 25% tariff plus penalties on India starting August 1, citing the country’s purchases of Russian military equipment and energy.

The impact of the increased tariffs on the domestic economy and inflation would be only known in a few months.

India’s reaction to tariff

The Ministry of Commerce has issued a guarded statement in response to Trump's announcement of tariffs and penalties on Indian exports to the US. The press release issued last night read as follows:

“The Government has taken note of a statement by the US President on bilateral trade.  The Government is studying its implications.

India and the US have been engaged in negotiations on concluding a fair, balanced and mutually beneficial bilateral trade agreement over the last few months. We remain committed to that objective

The Government attaches the utmost importance to protecting and promoting the welfare of our farmers, entrepreneurs, and MSMEs.

The Government will take all steps necessary to secure our national interest, as has been the case with other trade agreements including the latest Comprehensive Economic and Trade Agreement with the UK.”

Though the markets may react today to Trump's tariff announcement, it is too early to assess the impact. It is still not clear, whether key Indian exports like Pharma, that were part of a separate trade negotiation are also part of this 25% tariff announcement. The “penalty” is also a vague term at this point in time. A team of the US trade negotiators is scheduled to arrive in India later this month. It is possible that the tariffs are stayed till the negotiations are complete, or be reversed to a more favorable rate, just like it has been done in the case of South Korea yesterday.

This tariff announcement is at best a temporary measure, pending the finalization of a comprehensive trade deal likely to be finalized later this year.

I would therefore like to have more clarity before reacting to the tariffs. This includes not jumping to buy if the market falls sharply today.