Trump's Trade War Leads to Economic Uncertainty - Fed Remains Unmoved on Key Rate
Federal Reserve holds firm on interest rate stance.
The US economy is stuck in a rut, shaking things up after a long stretch of growth. The job market, surprisingly, remains solid. President Trump's trade strategies, though, are a source of concern. Despite his repeated calls, the Federal Reserve refuses to budge on the key interest rate. On Powell's part, he keeps that rate high, much to Trump's dismay.
The Federal Reserve's recent decision to hold the key interest rate steady at 4.25 to 4.50 percent was expected by analysts. Trump, however, pleaded for rate cuts in recent weeks. The Fed apparently cited the increased risk of higher inflation and the uncertainty surrounding Trump's aggressive trade policy as reasons for their decision.
Trump, never one to mince words, fired off, "I think I understand more about interest rates than he does." Nonetheless, the Fed operates independently of the government. And with Powell and Trump on a collision course, the Fed seemingly isn't in a hurry to budge.
Before mulling any monetary easing, the bank desires more clarity concerning the impact of Trump's trade dispute on the US economy. The Fed's latest warning? Uncertainty about the economic outlook has grown.
The economy expanded at a snail's pace during the early months of Trump's presidency, with a surprising contraction of 0.3 percent. But some experts believe an early easing isn't the way to go, given the surprisingly strong US labor market.
Small Rate Adjustments Expected This Year
The Fed aims to keep inflation in check; its desired inflation rate is 2 percent. In March, US consumer prices bumped up by 2.4 percent annually, down slightly from February's 2.8 percent. However, sustainability of the trend remains uncertain, as March preceded the extensive tariff package introduced by Trump.
Rising interest rates serve as a tool against escalating consumer prices. Skewing loans to the expensive side usually lessens demand, theoretically prodding companies to be more conservative with pricing. Higher interest rates may also foster savings, which can, however, hamper economic growth.
The Fed made its first significant rate cut in September 2022 at 0.5 percentage points, following a big inflation wave. Subsequently, smaller rate hikes of 0.25 points each followed in November and December. Since then, the central bank of the world's biggest economy has left the key rate untouched due to persisting inflation. The Fed envisions an average key rate of 3.9 percent by 2025, hinting at merely small rate adjustments this year.
Anxiety over Tariffs
Trump's whirlwind trade policy has stirred up a storm in financial markets, thanks to his frequent jabs at Fed Chair Powell. Yet, Trump recently clarified that he wouldn't replace Powell until May 2026.
On April 2, Trump imposed tariffs of 10 percent on imports from most countries, and levied additional tariffs for multiple trading partners, only suspending them for 90 days. Canada, Mexico, and China were subjected to 25 percent tariffs, while China saw tariffs soaring to 145 percent. Trump's administration is negotiating with over 15 countries to dodge the higher tariffs.
Trump stakes his economic policy on tariffs, pledging that they'll make America wealthier over the long haul and bring manufacturing jobs back. But businesses and citizens alike express worry due to uncertainty over tariffs and concerns that they might lead to higher prices.
- USA
- Jerome Powell
- Donald Trump
- Fed
- Interest rate
- Monetary policy decisions
- Tariffs
- Trade conflicts
- Trade relations
Insights:
- The ongoing US-China trade conflict is expected to cause a 2.3% increase in US inflation and potentially reduce the GDP growth by 0.9 percentage points in 2025 [2].
- With the US economy on a downward spiral, there's a possibility of quarters with negative growth, given the current tariff landscape. Nevertheless, strong household, corporate, and bank balance sheets reduce the risk of a deep financial crisis [2].
- The trade war negatively impacts supply chains, boosting costs for US companies, challenging their competitiveness compared to European companies with lower input costs [2].
- The Fed may adjust interest rates to stabilize markets in response to the economic slowdown caused by trade tensions. The Fed also considers the overall economic outlook, including potential recession, when making its decisions [2]. The Fed coordinates its actions with fiscal policies in managing the economic impacts and stabilizing financial markets [2].
Sources: 1. ntv.de, mpa/dpa/rts/DJ, 2. "The current impact of the US-China trade conflict on the US economy"
- The Fed's monetary policy decisions, such as the steady key interest rate, despite Trump's pleas for rate cuts, are citing the increased risk of higher inflation and the uncertainty surrounding Trump's aggressive trade policy.
- Amidst the ongoing trade conflicts, the USA, under Trump's administration, has imposed tariffs on imports from various countries, causing businesses and citizens to fear higher prices.
- Donald Trump and Fed Chair Jerome Powell are on a collision course, with Trump criticizing Powell's interest rate decisions, but the Fed, operating independently, seems reluctant to yield.
- The Fed aims to keep inflation at 2 percent by adjusting interest rates, but the prolonged trade war between the USA and China may create uncertainty, affecting the sustainability of the recent downward trend in consumer prices.
- In the wake of Trump's trade war and the resulting economic uncertainties, some experts suggest that the Fed might make small adjustments to interest rates this year, aiming to stabilize markets. However, the overall economic outlook, including potential recession, plays a significant role in the Fed's decisions.
