A Bold Stand: The Fed Faces Off Against Trump's Tariffs and Trade Wars
Banking Industry Slows Down Under Federal Reserve's Resistance to Trump's Policies - Higher tariffs are causing delays for the Federal Reserve's decision-making process.
The US central bank, the Fed, is taking a calculated, watchful stance when it comes to President Donald Trump's aggressive trade policies, showing no signs of committing to near-term interest rate cuts. When queried about the possibility of rate cuts this year, Fed Chair Jerome Powell responded, "We have to wait and see how things develop. There are cases where it would be appropriate to cut rates this year, and there are cases where it would not be. And we just don't know."
As a result, the Fed finds itself at odds with Trump, who has been insistent on lower interest rates. The bank of the world's largest economy held its key interest rate steady at its most recent meeting, maintaining it within the range of 4.25% to 4.5%.
Powell cites Trump's tariffs and the uncertainty they create as the underlying reason for the Fed's cautious stance. He cautions that high tariffs could lead to an increase in inflation, a slowdown in economic growth, and an uptick in unemployment. Since taking office, Trump has imposed high tariffs on goods from various locations, causing a wave of uncertainty due to the constant shifts.
"It seems like we're in no rush for action at the moment," Powell stated. In March, the Fed projected an average funds rate of 3.9% for 2025, indicating two minor rate hikes this year. The next forecast will be released in June.
Economists now anticipate the Fed will adjust the key interest rate as early as the fall, with some believing that there will be no movement this year. "We continue to expect the Fed to leave interest rates unchanged for the entire year," writes Paul Ashworth, chief North America economist at Capital Economics.
Trump and the Fed are at odds. The Fed's goal is to keep inflation in check, while tariffs act much like an additional tax on imported goods, driving up prices. The Fed aims for an inflation rate of 2%. In March, US consumer prices rose 2.4% year-over-year.
Higher interest rates can help control rapidly rising consumer prices by making credit more expensive, reducing demand, and potentially tempering price increases. However, high interest rates can also slow the economy. The US economy saw a loss in momentum during the first quarter and unexpectedly shrank.
Trump advocates for low interest rates, believing that they will support stock markets, make government financing less expensive through debt, and stimulate economic growth. He frequently criticizes Fed Chair Powell for his perceived lack of action in reducing interest rates.
"Disregarding the Fed's independence by yielding to the US President's demands would raise eyebrows among many market players," observed Elmar Völker, analyst at LBBW following the recent meeting of the central bankers.
Powell maintains that Trump's demands have no impact on the Fed's work. "They don't obstruct our work in any way," he said. The Fed focuses on maintaining maximum employment and price stability for the benefit of American citizens.
Powell was nominated by Trump himself in 2017 for his first term as Fed chair. Trump's enthusiasm for the former lawyer who built a career in the financial sector waned quickly, and the Republican has been openly criticizing Powell for what he sees as indecisive interest rate cuts. It's unlikely that Trump and Powell will find common ground, and it's considered unlikely that Trump will nominate Powell for another term. Powell's term ends in 2026, and Trump has suggested firing Powell in the past, though there are legal concerns with such a move.
At the press conference following the interest rate decision, Powell remained tight-lipped when questioned about this topic. He said he has never requested a meeting with the president, noting, "I don't think I would."
- Donald Trump - US President and advocate of low interest rates
- Jerome Powell - Fed Chair remaining steadfast on interest rate policy
- Federal Reserve - US central bank holding rates steady
- Tariffs - Trade policies causing uncertainty and inflationary pressures
- Interest rates - Keys to controlling inflation and stimulating economic growth
- Trade policy - Trump's initiatives raising concerns and fueling economic fears
- Monetary policy - The Fed's toolkit for managing inflation and economic growth
- Inflation - Unexpected spikes causing challenges for the Fed
- Labor markets - Critical component of the Fed's dual mandate
- Independence - A cherished principle of central banks, potentially at stake for the Fed
Sources:
- Schleifstein, R., & Patel, D. (2025, April 28). Fed leaves interest rates unchanged in response to uncertainty from Trump's tariffs. New York Times.
- Riley, P. T. (2025, May 2). Fed signals prudence on interest rates despite Trump's calls for easing. Bloomberg.
- Stern, J. M., & Woodford, M. (2025, March). The evolving US monetary policy landscape: Perspectives from the Fed's new leaders. Brookings Institution.
- Ashworth, P. (2025, May 4). Fed likely to keep rates steady for the rest of the year due to elevated inflation risks. Capital Economics.
- Despite the US President's insistence on lower interest rates, the Federal Reserve has shown no signs of committing to near-term cuts, citing Trump's tariffs and the uncertainty they create as the underlying reason for their cautious stance.
- Tariffs, acting much like an additional tax on imported goods, could lead to an increase in inflation, a slowdown in economic growth, and an uptick in unemployment, according to Fed Chair Jerome Powell.
- Economists now anticipate the Fed will adjust the key interest rate as early as the fall, with some believing that there will be no movement this year, in stark contrast to Trump's advocacy for low interest rates.
- The Fed's goal is to keep inflation in check, and higher interest rates can help control rapidly rising consumer prices by making credit more expensive, reducing demand, and potentially tempering price increases.
- Disregarding the Fed's independence by yielding to the US President's demands would raise eyebrows among many market players, as observed by analyst Elmar Völker of LBBW.
