Fed Stays the Course as US Economic Uncertainty Grows Amid Trade Wars
Federal Reserve remains steadfast in interest rate decisions
In the midst of an uncertain economic climate, the Federal Reserve has kept its key interest rate steady. The interest rate remains between 4.25% and 4.50%, a move analysts had anticipated. Despite repeated pleas from President Trump, Fed Chair Jerome Powell has held his ground.
The Fed sees a higher risk of inflation due to Trump's aggressive trade policies, one of the reasons behind keeping the key rate high. Trump has been critical of Powell in the past, claiming to have a deeper understanding of interest rates. Yet, the Fed operates independently, setting interest rates without regard for political pressure.
As tensions with various trading partners escalate, the Fed remains unconvinced that the time for rate cuts has come. The bank wants to gauge the full impact of these trade conflicts on the US economy and prices before making any drastic decisions. Amid the economic uncertainty, this "wait-and-see" approach may put Powell and Trump on a collision course.
The US economy showed signs of shrinking in the first quarter of the year, with a 0.3% GDP decline compared to the previous quarter. However, the labor market remains robust, a point in favor of a delayed easing.
Two Steps Expected This Year
Inflation remains a concern for the Fed, currently at 2.4%. This rate is above the Fed's target of 2.0%. High interest rates can help combat inflation by making loans more expensive, which in turn dampens demand and helps maintain price stability. However, this approach could slow economic growth.
In 2022, the Fed initiated a rate hike of 0.5 percentage points in September following a surge in inflation. Since then, the key rate has remained unchanged due to persistently high inflation. The Fed projects that the average key rate will be 3.9% in 2025, suggesting two small rate steps in 2023.
Tariffs: Cause for Concern among Americans
Trump's erratic trade policies have stirred turmoil in financial markets, which have also been impacted by his verbal attacks on Powell. Despite threatening to dismiss Powell, Trump has recently stated that he has no plans to do so before May 2026.
Trump's tariffs have raised concerns among Americans, who fear that they will lead to increased prices and uncertain economic conditions. The ongoing trade negotiations with over 15 countries may help address some of these concerns if successful in avoiding higher tariffs.
- President Trump
- Jerome Powell
- Fed
- Interest Rate
- Interest Rate Decisions
- Tariffs
- Trade Conflicts
Interestingly, the economy remains resilient in spite of uncertainties, exhibiting continued economic activity with low unemployment and solid labor market conditions [1]. The Fed is cautious about cutting rates due to concerns about exacerbating inflation caused by tariff-induced price increases [1][2]. Ongoing assessments of the full impact of trade policies will help the Fed adjust monetary policy when appropriate [4].
[1] FRED Economic Data, mpa, dpa, rts, DJ, ntv.de[2] The Balance, Investopedia, The Wall Street Journal, The New York Times, Financial Times[3] Council on Economic Advisers, Treasury Department, White House, Office of the U.S. Trade Representative[4] The St. Louis Fed, The Federal Reserve Bank of New York, The Atlanta Fed, The Federal Reserve Bank of Richmond, The Federal Reserve Bank of Dallas, The Federal Reserve Bank of San Francisco, The Fed News Service, The Associated Press, and Reuters (news agencies)
- Despite President Trump's repeated calls for lower interest rates, Fed Chair Jerome Powell has maintained the Fed's interest rate, citing economic uncertainty caused by trade wars as a reason for caution.
- The Federal Reserve, in its interest rate decisions, remains unconvinced that the time for rate cuts has come amidst ongoing trade conflicts, preferring to gauge the full impact on the US economy and prices before making any drastic moves.
- President Trump's tariffs, a key component of his trade policies, have raised concerns among Americans and are believed to be causing inflation through price increases.
- The Fed, aware of the inflation risks associated with tariff-induced price increases, is carefully assessing the full impact of trade policies before adjusting its monetary policy.
- With the Fed projecting an average key rate of 3.9% in 2025, the expectation is for two small rate steps in 2023, despite the ongoing trade uncertainties and calls from President Trump for lower rates.
