Elon's Backup Plan for AI

Elon Musk just poured $51M into the "Quantum Power Grid" - a next-gen system built to fix AI's fatal flaw: energy. Today's AI models need 10,000x more power than older tech. This grid uses advanced metals to transfer energy faster, cleaner, and with near-zero resistance. Chris Rowe explains.

Federal Reserve likely to defy Trump, keep rates unchanged this week

CHRISTOPHER RUGABER
May 05, 2025

WASHINGTON (AP) -- The Federal Reserve will likely keep its key short-term interest rate unchanged on Wednesday, despite weeks of harsh criticism and demands from President Donald Trump that the Fed reduce borrowing costs.

After causing a sharp drop in financial markets two weeks ago by saying he could fire Fed Chair Jerome Powell, Trump subsequently backed off and said he had no intention of doing so. Still, he and Treasury Secretary Scott Bessent have said the Fed should cut rates.

They argue that inflation has steadily cooled and high borrowing costs are no longer needed to restrain price increases. The Fed sharply ramped up its short-term rate in 2022 and 2023 as pandemic-era inflation spiked.

Separately, Elon Musk, the head of Trump's Department of Government Efficiency, last Wednesday suggested that DOGE should look more closely at the Fed's spending on its facilities.

The heightened scrutiny shows that even as the Trump administration backs off its threats to fire Powell, the Fed is still subject to unusually sharp political pressures, despite its status as an independent agency.

Even so, the Fed will almost certainly leave its key rate unchanged at about 4.3% when it meets Tuesday and Wednesday. Powell and many of the other 18 officials that sit on the Fed's rate-setting committee have said they want to see how Trump's tariffs affect the economy before making any moves.

Trump, however, on Friday said on the social media platform Truth Social that there is "NO INFLATION" and claimed that grocery and egg prices have fallen, and that gas has dropped to $1.98 a gallon.

That's not entirely true: Grocery prices have jumped 0.5% in two of the past three months and are up 2.4% from a year ago. Gas and oil prices have declined -- gas costs are down 10% from a year ago -- continuing a longer-running trend that has continued in part because of fears the economy will weaken. Still, AAA says gas prices nationwide average $3.18 a gallon.

Inflation did drop noticeably in March, an encouraging sign, though in the first three months of the year it was 3.6%, according to the Fed's preferred gauge, well above its 2% target.

Without tariffs, economists say it's possible the Fed would soon reduce its benchmark rate, because it is currently at a level intended to slow borrowing and spending and cool inflation. Yet the Fed can't now cut rates with Trump's broad tariffs likely to raise prices in the coming months.

Vincent Reinhart, chief economist at BNY, said that the Fed is "scarred" by what happened in 2021, when prices rose amid supply snarls and Powell and other Fed officials said the increase would likely be "transitory." Instead, inflation soared to a peak of 9.1% in June 2022.

This time they will be more cautious, he said.

"That's a Fed that is going to have to wait for evidence and be slow to adjust on that evidence," Reinhart said.

Plus, Trump's badgering of Powell makes it harder for the Fed chair to cut rates because doing so anytime soon would be seen as knuckling under to the White House, said Preston Mui, an economist at Employ America.

"You could imagine a world where there isn't pressure from the Trump administration and they cut rates ... sooner, because they feel comfortable making the argument that they're doing so because of the data," he said.

For his part, Powell said last month that tariffs would likely push up inflation and slow the economy, a tricky combination for the Fed. The central bank would typically raise rates -- or at least keep them elevated -- to fight inflation, while it would cut them to spur the economy if unemployment rose.

Powell has said that the impact of the tariffs on inflation could be temporary -- a one-time price increase -- but most recently said it "could also be more persistent." That suggests that Powell will want to wait, potentially for months, to ensure tariffs don't sustainably raise inflation before considering a rate cut.

Some economists forecast the Fed won't cut rates until its September meeting, or even later.

Yet Fed officials could move sooner if the tariffs hit the economy hard enough to cause layoffs and push up unemployment. Wall Street investors appear to expect such an outcome -- they project that the first cut will occur in July, according to futures pricing.

Separately, Musk criticized the Fed Wednesday for spending $2.5 billion on an extensive renovation of two of its buildings in Washington, D.C.

"Since at the end of the day, this is all taxpayer money, we should certainly look to see if indeed the Federal Reserve is spending $2.5 billion on their interior designer," Musk said. "That's an eyebrow raiser."

Fed officials acknowledge that the cost of the renovations have risen as prices for building materials and labor have spiked amid the post-pandemic inflation. And former Fed officials, speaking on background, say that local regulations forced the Fed to do more of the expansion underground, rather than making the buildings taller, which added to the cost.

Meanwhile, Kevin Warsh, a former Fed governor and a potential candidate to replace Powell as chair when Powell's term expires next year, said recently that the Fed has attracted greater scrutiny because of its failure to keep prices in check.

"The Fed's current wounds are largely self-inflicted," he said in a speech during an International Monetary Fund conference in late April, in which he also slammed the Fed for participating in a global forum on climate change. "A strategic reset is necessary to mitigate losses of credibility, changes in standing, and most important, worse economic outcomes for our fellow citizens."

Powell, for his part, said last month that "Fed independence is very widely understood and supported in Washington, in Congress, where it really matters."

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