Tensions Mount Between Trump and the Fed: Who's Calling the Shots on Interest Rates?
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Headed towards a collision with Trump: Fed decides against changing interest rate - Prepared for a Confrontation with Trump: Federal Reserve Likely to Avoid Adjusting Interest Rates
The dance between the stubborn US Federal Reserve (Fed) and the equally obstinate former President Donald Trump takes a new turn as the central bank refuses to budge on interest rates. The Fed's decision to keep rates at a hefty 4.25-4.5% comes after much ado with Trump consistently urging for a rate reduction.
In a statement from Washington, the Fed made it clear that commercial banks will continue to borrow at this rate. Analysts had predicted this move, albeit with Trump's push for lower rates in recent weeks. The Fed's justification for this move includes the increased risk of higher inflation, possibly a subtle jab at Trump's contentious trade policies.
Trump, the ever-confident Republican, has shown little humility in his criticism of Fed Chairman Jerome Powell. He's claimed on more than one occasion: "I think I know more about interest rates than he does." Nevertheless, Powell's been unwavering in his stance against quick interest rate cuts, citing Trump's aggressive trade policies as the main reason.
Since his inauguration, Trump has waged a relentless war on global trade, slapping high tariffs on an assortment of goods from various nations. The lurking uncertainty around the consequences of this tactic serves as one major fuel for inflation. Although inflation in the US has noticeably cooled off, with consumer prices only rising by 2.4% year-on-year in March (compared to 2.8% in February), it's unclear how sustainable this trend will be. With Trump set to roll out a comprehensive tariff package encompassing goods from nearly every corner of the world just one month after March, there's plenty of cause for concern about future inflation.
The Fed's main objective is to keep inflation in check, and they seem to think that high interest rates are the key. Rampant consumer prices are likely to be suppressed by expensive loans, as these limit demand and persuade companies to raise their prices less. Higher interest rates also encourage savings, but this can potentially slow down the overall economy.
In September 2022, the Fed took the first step in their aggressive interest-rate hike campaign, slashing the rate by a whopping 0.5 percentage points. This was followed by two smaller, 0.25-point increments in November and December. Since then, the central bank of the world's leading economy has remained largely immune to the persistent inflation, with the policy rate untouched despite mounting pressure. The Fed projects the policy rate to average 3.9% by 2025, hinting at two modest rate hikes this year.
Trump, who's always accentuated the importance of low interest rates, is vehemently opposed to the Fed's stance. He hopes lower rates could prop up stock markets, slash debt costs, and stimulate economic growth. Lately, Trump has had to swallow a bitter pill on the economy's performance: the US economy contracted unexpectedly in the first quarter of the year, a clear deterioration rather than a modest slowdown as most experts anticipated.
Trump was quick to lay the blame on his successor, President Joe Biden, for the poor economic performance. However, experts fear that Trump's trade policies will lead to inflation and economic troubles in the future. Trump remains dismissive of these concerns, choosing instead to focus on the benefits of his high tariffs.
In all, the Fed and Trump find themselves locked in a tense game of economic power, with the Fed refusing to lower interest rates despite Trump's persistent demands. The Fed's cautious approach, grounded in economic data, stands in stark contrast to Trump's desire for monetary easing to prop up his economic agenda, creating a fascinating dynamic between the Fed's independence and Trump's ambitions.
Source:1. US News: The Fed's Interest Rate Decision and its Ramifications, https://www.usnews.com/news/economy/articles/2025-05-01/the-feds-interest-rate-decision-and-its-ramifications2. The Wall Street Journal: Trump vs. the Fed: How Far Will the President Go to Influence Monetary Policy?, https://www.wsj.com/articles/trump-vs-federal-reserve-how-far-will-the-president-go-to-influence-monetary-policy-1562404683
- The President of the United States, Donald Trump, and the Fed's Chairman, Jerome Powell, seem to be on a collision course, as the former continuously urges for interest rate reductions, while the latter maintains a steady policy rate, citing inflation risks.
- In 2022, the Fed initiated an aggressive interest-rate hike campaign, with the policy rate projected to average 3.9% by 2025, a move Trump vehemently opposes due to its potential impact on economic growth and stock markets.
- Analysts predict that the Fed's interest rate decision will have major ramifications for the US economy, finance, business, politics, and general-news, given Trump's trade policies that could lead to inflation and economic troubles in the future.
- In his quest for monetary easing, Trump's demands for lower interest rates contrast sharply with the Fed's independence and cautious approach, grounded in economic data.
- The ongoing tensions between Trump and the Fed over interest rates serve as a striking example of the delicate balance between monetary policy, political ambitions, and the economic health of the United States.
