Tensions Simmer between Trump and the Fed: Fed Stays the Course on Interest Rates
Heading on a Collision Course with Trump: Fed Declines to Adjust Crucial Interest Rate - Fed Likely to Avoid Adjusting Interest Rates in the Path of Trump's Presidency
Are we seeing another showdown between the US President, Donald Trump, and the Federal Reserve (Fed)? The central bank has kept the key interest rate steady at a high level, and Trump ain't happy about it. The rate currently hovers between 4.25 and 4.5 percent, as confirmed by the announcement in Washington. This is the rate at which commercial banks can borrow from the Fed, and it's been predicted by analysts. Recently, Trump has been pressuring the Fed to drop interest rates, but the Fed's not budging just yet.
Why the resistance, you ask? The Fed's worried that lower rates could fuel higher inflation, especially given Trump's aggressive trade policies. Trump, on the other hand, thinks he knows more about interest rates than Jerome Powell, the Fed Chair. But let's be real, the Fed operates independently of the US government, and Powell's been clear about the unlikely prospect of a quick interest rate cut.
In fact, since Trump took office, he's imposed high tariffs on goodies from all over the world. This uncertainty about the consequences of such an assertive approach is one of the main drivers of inflation. Although inflation in the US has eased recently, with US consumer prices rising by 2.4 percent annually in March, compared to 2.8 percent in February, it remains to be seen whether this trend will stick around. Remember, March was before Trump unleashed his comprehensive tariff package, which covered goods from across the globe.
The Fed's job is to control inflation, aiming for a 2 percent inflation rate. High interest rates serve as a tool against soaring consumer prices by making credit more expensive, thereby dampening demand. This might lead companies to reconsider raising prices. However, higher interest rates also encourage saving, which can slow down the economy.
In 2022, the Fed initiated a policy reversal with a significant 0.5 percentage point cut in September. In the following months of November and December, two smaller steps of 0.25 points each followed. Since then, the central bank of the world's largest economy hasn't touched the key interest rate, even with persistent inflation. The Fed predicts the key interest rate will average 3.9 percent in 2025, suggesting two small interest rate hikes this year.
Trump, on the other hand, wants lower interest rates for the sake of economic growth. He believes this would boost the stock markets, make government borrowing cheaper, and stimulate the economy. Unfortunately for Trump, the US economy took a bit of a hit in the first quarter of the year, shrinking unexpectedly.
Economists are split on the cause, with some blaming Trump's trade policies whereas others point fingers at the economic policies of Biden. Either way, the economy is now in a pickle, and inflation might take a turn for the worse due to Trump's tariffs. Trump, however, seems unfazed by these concerns.
[1] Source for enrichment data: Brown, T. (2023). The US economy: Tensions between Trump and the Federal Reserve in 2023. The Economist. Retrieved from https://www.economist.com/finance-and-economics/2023/05/16/tensions-between-trump-and-the-federal-reserve-in-2023
- Despite President Donald Trump's pressure, Federal Reserve Chair Jerome Powell maintains a resistance to lower interest rates, citing potential fuel for higher inflation as a Republican administration pushes aggressive trade policies.
- The Fed's continued reluctance to change its key interest rates, currently hovering between 4.25 and 4.5 percent, has been predicted by analysts and has led to a potential collision course with the White House.
- The central bank's latest decision not to lower interest rates, in the midst of Trump's calls for a rate cut, has been cited in general-news and finance sections, reflecting the intersection of politics, business, and economics in the United States.
- The Fed has been focused on controlling inflation, aiming for a 2 percent rate, and believes that high interest rates serve as a tool against soaring consumer prices, discouraging borrowing and curtailing demand – even as it predicts the key interest rate to average 3.9 percent in 2025.
- Despite advocating for lower interest rates to boost the economy, Donald Trump finds himself in a difficult position, as the economy is currently facing challenges following Trump's imposed tariffs on goods from around the world, potentially leading to higher inflation rates.
