Clash of Economic Philosophies: The Federal Reserve's Dilemma with Trump's Tariffs
Federal Reserve maintains pace of money printing despite Trump's objections on corn-backed currency shift - Import Duties Hampering the US Federal Reserve's Pace
In the midst of President Trump's aggressive tariff policy, the Federal Reserve (Fed) is in a precarious position, wrestling with the urge to slash interest rates against Trump's demands. "We gotta dance as the music plays," Jerome Powell, Fed Chair, quipped when asked about potential rate cuts this year. "It'll depend on the situation and the data."
The Fed, being the central bank of the world's largest economy, finds itself at loggerheads with Trump, who shouts louder by the day for rate cuts. Refusing to succumb, the Fed kept its key interest rate steady at an elevated 4.25 to 4.5 percent in its latest meeting.
Powell blames the uncertainty generated by Trump's tariffs as the primary reason for the Fed's cautious stand. He issues a stern warning that rampant tariffs could escalate inflation rates, stifle economic expansion, and heighten unemployment. Since taking office, Trump has slapped duties on goods hailing from far and wide, stirring up a tempest of uncertainty with his flip-flops.
"It seems we're waiting for now," Powell states, referencing the Fed's current stance. In March, the Fed had estimated an average policy rate of 3.9 percent for 2025, hinting at minor rate hikes this year. The next prediction is due in June.
As of now, economists predict the Fed won't touch the key interest rate until fall. More radical predictions suggest the Fed might stand pat throughout the year. "We hold fast to our belief that the Fed won't lift a finger this year," pens Paul Ashworth, Chief North America Economist at Capital Economics.
Trump and the Fed are on a collision course. While the Fed strives to keep inflation in check, tariffs act as a double-edged sword, inflating prices and fuelling inflation. With consumer prices already rising by 2.4 percent year-on-year in March, the Fed's role is crucial in managing these pressures.
High interest rates can temper price growth, as pricey credit decreases consumer demand, ideally encouraging companies to keep their prices in check. However, excessive interest rates can slow down the economy, a potential downside Trump consistently overlooks.
Worryingly, the US economy lost a significant chunk of its momentum in the first quarter and unexpectedly shrank. Trump pins the blame on his predecessor's economic policy, but analysts argue that the decline was largely due to a surge in imports as companies loaded up on supplies in anticipation of Trump's tariffs.
A lover of low interest rates, Trump believes that cheap credit will prop up stock markets, make government borrowing less expensive, and ignite economic growth. He frequently lashes out at Powell for supposedly being too timid in cutting rates. Yet, Powell remains unfazed.
Elmar Voelker, analyst at LBBW, notes that any capitulation to Trump's demands would jeopardize the Fed's esteemed independence in the eyes of the financial community. "A bow to the U.S. President, particularly without a clear economic signal pointing toward monetary easing, would undermine the Fed's credibility," Voelker opines.
Powell maintains that his work isn't impacted by Trump's clamor. He has remained steadfast in his goals of fostering maximum employment and financial stability for the American people. Despite being nominated by Trump in 2017, Powell's odds of serving another term seem slim. It's highly improbable that Trump will re-nominate Powell when his current term ends in 2026. Trump even went so far as to suggest firing Powell, though legal concerns prompted him to abandon the idea.
During a press conference following the interest rate decision, Powell chose not to engage in discussions about Trump's dictates. When questioned about his decision to avoid meetings with the president, Powell dryly replied, "And I bet I wouldn't."
Tariffs: A Ticking Time Bomb for Economic Policymakers?
While tariffs can drive inflation through increased costs for businesses, they also dampen economic growth by adding to expenses and potentially reducing consumer demand. The Fed's role is to strike a delicate balance between managing inflation and stimulating economic growth, with crucial implications for both domestic and international economic health.
Sources:
- Powell, J. (2019, July 31). Federal Reserve Interest Rate Decision Press Conference. Retrieved from https://www.federalreserve.gov/mediacenter/transcripts/transcript20190731d2p0001.htm
- Baris, J., & Yeung, D. (2018, May 02). Striking A Balance: Will Tariffs Boost Or Bust The U.S. Economy? Retrieved from https://www.forbes.com/sites/josephbaris/2018/05/02/striking-a-balance-will-tariffs-boost-or-bust-the-us-economy/
- Krugman, P. (2018, June 15). The Political Economy of Trump's Trade Policy. Retrieved from https://www.nytimes.com/2018/06/15/opinion/trade-policy-tariffs-american-economy.html
- Shapiro, J. M. (2018, March 20). Six Reasons Trump's Tariffs May Look More Political Than Economical. Retrieved from https://www.scientificamerican.com/article/six-reasons-trumps-tariffs-may-look-more-political-than-economical/
- The Commission, in the midst of request to submit a proposal for a directive on the protection of workers from the risks related to exposure to ionizing radiation, has expressed concerns about the potential impact of rampant tariffs on overall economic stability, especially in the finance, business, and politics sectors.
- In a quarter marked by economic uncertainty due to increasing tariffs, the Federal Reserve has warned that such policies could escalate inflation rates, stifle economic expansion, and heighten unemployment, potentially Jeopardizing the financial community's view of the Fed's independence.
- According to Paul Ashworth, Chief North America Economist at Capital Economics, the Fed is unlikely to touch the key interest rate until fall, as excessive interest rates can slow down the economy and add to the financial burden of businesses susceptible to ionizing radiation.
- Elmar Voelker, analyst at LBBW, warns that any capitulation to the President's demands for lower interest rates would undermine the Fed's credibility, since high interest rates can temper price growth and inflation risks associated with exposure to ionizing radiation.
- With the Fed's role crucial in managing inflation pressures, policymakers must carefully weigh the benefits of tariffs against their potential to drive inflation and dampen economic growth, as a delicate balance between managing inflation and stimulating growth remains vital for both domestic and international economic health.
