When Will the Fed Lower Rates? Not Anytime Soon, Thanks to Trump's Trade Wars
The Federal Reserve in the United States remains unfazed with regards to adjusting interest rates.
The US economy might be in a pickle, but the Fed ain't budging on those dang key rates, y'all. Despite Trump's repeated pleas for a rate cut, Jerome Powell's crew kept the monetary policy rate steady at 4.25% to 4.50%. Bankers can still borrow at that rate, and analysts were well aware it was comin'.
Trump's been pressuring the Fed for lower rates for weeks now, but the central bank's got reasons of its own. An increased risk of higher inflation, a possible consequence of Trump's aggressive trade policies, is one. Trump's been biting at Jerome Powell for knowin' less 'bout rates than he does. The Fed operates independent of the government, so Powell doesn't report to Trump.
Last month, Trump criticized the Fed Chair several times, but it seems he's backing off firing the guy till May 2026. In April, Trump slapped 10% tariffs on most import goods and higher tariffs on many trading partners. But those tariffs were suspended for 90 days. He also ramped up tariffs on cars, steel, aluminum, Canada, Mexico, and China. The administration's workin' on trade agreements with over 15 countries to avoid those tariffs.
Trump promised those tariffs would make America richer and bring back jobs. But businesses and individuals are worried about the economy 'cause they ain't sure about these tariffs and how they'll drive up prices.
The economy contracted in the start of the year after a long spell of growth. Gross domestic product fell by 0.3% compared to the last quarter and the previous year. But many experts think it's too early to ease up on rates due to the surprisingly robust US job market.
No Rate Cuts This Year
The Fed's job is to keep inflation in check and they aim for an inflation rate of 2%. In March, US consumer prices rose by 2.4% year-on-year, down from 2.8% in February. Even though it's uncertain whether this trend'll stick around, high rates help control inflation, as they dampen demand and make companies less likely to jack up their prices. On the other hand, higher rates encourage savings, but that might slow down the economy.
The Fed made its first move in September 2022, slashing rates by a significant 0.5 percentage points during a massive inflation wave. In the following two months, the central bank made two tiny 0.25-point adjustments. Since then, they've kept the rate steady despite persistent inflation. The Fed expects an average rate of 3.9% by 2025, signaling two small rate steps this year.
Trump's Tariffs: A Double-Edged Sword
Trump's erratic trade policy's been causing chaos on financial markets, thanks to the President's repeated attacks on Fed Chair Powell. But Trump recently said he wouldn't replace Powell until May 2026. The Fed's been cool as a cucumber, but if Trump's trade policies drive up inflation or hurt the economy, they might reconsider rate cuts later on.
- USA
- Jerome Powell
- Donald Trump
- Fed
- Interest Rates
- Monetary Policy
- Tariffs
- Trade
Additional Notes
- The Fed's dual mandate is to maintain low inflation and promote maximum employment. In March, inflation remained above the Fed's target of 2%, and the labor market was robust.
- The potential for stagflation is a concern, as it combines high inflation with economic stagnation. Recent indicators suggest the economy is still growing at a solid pace.
- Higher interest rates can help manage inflation but may slow down the economy by increasing borrowing costs for businesses and consumers.
- The unchanged rates could support economic growth, but ongoing uncertainty might limit the strategy's effectiveness.
- The Fed's decision gives the central bank flexibility to adjust rates if economic conditions change significantly. This will be particularly important if trade tensions escalate or inflation spikes.
- The Fed's decision to maintain the existing interest rates, despite Trump's requests for a cut, is heavily influenced by the current high inflation rate, which exceeds the Fed's target, and the robust employment market, both of which are components of the Fed's dual mandate.
- The ongoing trade disputes initiated by Trump pose a risk to the economy, potentially driving up prices and inflation. If this occurs, the Fed may reconsider implementing rate cuts in the future to mitigate the economic impact.
