Fed leaves rates steady despite Trump pressure, gives no hint of September cut

• US central bank leaves policy rate in 4.25%-4.50% range
• Two Fed governors dissent on policy decision
• Trump has repeatedly demanded that Fed cut rates

By Howard Schneider and Michael S. Derby

WASHINGTON, July 30 (Reuters) - The U.S. central bank held interest rates steady on Wednesday and Federal Reserve Chair Jerome Powell's comments after the decision undercut confidence that borrowing costs would begin to fall in September, possibly stoking the ire of President Donald Trump who has demanded immediate and steep rate relief.

Powell said the Fed is focused on controlling inflation - not on government borrowing or home mortgage costs that Trump wants lowered - and added that the risk of rising price pressures from the administration's trade and other policies remains too high for the central bank to begin loosening its "modestly restrictive" grip on the economy until more information is collected.

While there will be two full months of data before the Fed's September 16-17 meeting, Powell said the central bank was still in the early stages of understanding how Trump's rewrite of import taxes and other policy changes will unfold in terms of inflation, jobs and economic growth.

"You have to think of this as still quite early days," Powell said in a press conference after the release of the Fed's latest policy statement. "There's quite a lot of data coming in before the next meeting. Will it be dispositive? ... It is really hard to say."

Those comments, and others that placed the burden on upcoming data to convince policymakers that lower rates were warranted, led investors to reduce the probability of a rate cut in September to less than 50%, after entering this week's two-day Fed meeting at nearly 70%. Treasury yields rose while the S&P 500 .SPX and Dow Jones Industrial Average .DJI equities indexes closed marginally lower.

Powell "made clear that he thinks the Fed has room to hold the fed funds rate steady for a period of time and wait and see how much tariffs affect inflation," said Bill Adams, chief economist at Comerica Bank, projecting that the central bank won't cut rates until its last meeting of the year in December.

"If the unemployment rate holds steady and tariffs push up inflation, it will be hard to justify a rate cut in the next few months."

The latest policy decision was made by a 9-2 vote, what passes for a split outcome at the consensus-driven central bank, with two Fed governors dissenting for the first time in more than 30 years.

Trump has given Powell the pejorative nickname "Too Late" for his refusal to cut rates, but the Fed chief on Wednesday said his hope was to be right on time when the decision is made to lower borrowing costs, neither moving so soon that inflation reemerges, or waiting so long that the job market slides and the unemployment rate rises. Indeed, Powell said the fact that the Fed isn't discussing rate hikes could be seen as a willingness to overlook some of the expected impact of tariffs.

"If you move too soon, you wind up not getting inflation all the way fixed ... That's inefficient," Powell told reporters. "If you move too late, you might do unnecessary damage to the labor market ... In the end, there should be no doubt that we will do what we need to do to keep inflation controlled. Ideally, we do it efficiently."

The data since the Fed's June 17-18 meeting has given policymakers little reason to shift from the "wait-and-see" approach they have taken on interest rates since Trump's January 20 inauguration raised the possibility that new import tariffs and other policy shifts could put upward pressure on prices.

Inflation is about half a percentage point above the Fed's 2% target and has shown signs of increasing as prices of some heavily imported goods begin to rise, a process Powell said is expected to continue. As of June, Fed policymakers at the median expected inflation to rise further and end the year at about 3%.

New inflation data for June will be released on Thursday, and a key jobs report for the month of July will follow on Friday, part of the data Powell said policymakers will evaluate as they debate a possible rate cut in September.

Earlier on Wednesday, the U.S. government reported that economic growth rebounded more than expected in the second quarter, but declining imports accounted for the bulk of the improvement and domestic demand rose at its slowest pace in 2-1/2 years.

'THOUGHTFULLY ARGUED'

Along with Powell's comments, the Fed's new policy statement also gave little hint that rates were likely to fall soon, particularly with an unemployment rate that has stabilized around 4% as weaker hiring trends are offset by slowing growth in the labor force due to Trump's immigration policies.

"The unemployment rate remains low, and labor market conditions remain solid. Inflation remains somewhat elevated," the central bank said after voting to keep its benchmark overnight interest rate steady in the 4.25%-4.50% range for the fifth consecutive meeting.

The two dissents came from Fed Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller, who has been mentioned as a possible nominee to replace Powell when the Fed chief's term expires next May. Bowman and Waller, both appointed to the board by Trump, "preferred to lower the target range for the federal funds rate by one quarter of a percentage point at this meeting," the Fed's policy statement said.

Powell characterized their opposition to the policy decision as part of a debate that was "argued, very thoughtfully ... all around the table," but with a majority of policymakers still reluctant to cut rates without more inflation data in hand.

A bipartisan figure who was appointed to the Fed's board by former President Barack Obama and later promoted to the top job by Trump, Powell voted to hold rates steady, as did three other governors and the five Fed regional bank presidents who currently hold a vote on the FOMC. The Fed's regional bank presidents are hired by local boards of directors who oversee the Fed's 12 regional institutions.

Governor Adriana Kugler was absent and did not vote.

Dissenting members of the FOMC often release statements explaining their vote on the Friday following Fed meetings.

Graphic-US benchmark interest rate