Trump summons Fed’s Powell and tells him he’s wrong with the fee.
US President Donald Trump called Federal Reserve Chairman Jerome Powell on May 29 for his first in-person meeting since taking office in January, telling the central bank chief that he was “mistakes” by not lowering interest rates.
This week’s Federal Reserve Conference is not expected to pack much drama.
With uncertainty about the impact of President Donald Trump’s tariffs on inflation and the economy still rising, the Fed is expected to be unable to change key interest rates in its fourth consecutive meeting. However, due to inflation concerns, there is a possibility that they will refrain from forecasting two rate cuts this year, according to JPMorgan Chase economist Michael Feroli.
It’s also a pretty good bet that fireworks will arrive after the Fed announces its decision, assuming President Donald Trump lambasts it and as Speaker Jerome Powell has repeatedly done in recent weeks.
Trump is asking the Fed to cite the European Central Bank’s aggressive rate reduction campaign over the past year, generally calling for a significant drop, a strategy that juices the economy and stock markets.
“‘Too late’ Powell now has to lower the rate,” Trump wrote in a social media post on June 5th after disappointing private sector employment growth in May by payroll processor ADP. “He’s incredible!!! Europe has dropped nine times!”
The European Central Bank (ECB) had actually cut its benchmark rate seven times at the time of Trump’s post, but cut it again the next day.
Do you have points for Trump? Does the Fed’s permanent on-sitting approach put the US at an economic disadvantage compared to the eurozone?
Simply put, is the Fed losing a global race with the ECB to cut interest rates?
In a way. But that’s not the case.
What is the Fed’s interest rate today?
The Fed cut its key rates late last year after the pandemic-related inflation spike was eased, but paused as it waited to see the impact of Trump’s drastic tariffs on inflation and the economy.
Central banks will lower rates to bolster the economy’s decline, hiking rates or keeping them high beyond inflation. But Trump’s tariffs are an extraordinary dilemma for Fed officials as they are expected to stifle growth by raising consumer prices and robbing households of purchasing power.
Meanwhile, the ECB has reduced its benchmark rate by a total of 2 percentage points over the past year as eurozone inflation eased while the economy remains anemia.
This brings the key rate to 2%, more than 2% below the Fed 4.25% to 4.5%, making it one of the biggest memory region-regional gaps these days.
Trump did not elaborate on why he is suffering about the big disparity in rates between the US and the eurozone last week, but he has been more specific in the past.
In August 2019, after the Fed approved the first of its three-quarters cut, Trump noted that Germany’s main short-term rate was negative, calling the one-point cut “at least.”
“We compete with many countries with much lower interest rates. We should be lower than them,” Trump tweeted at the time. He later added, “The strongest dollar in history, exports are very strict.”
Why is weak dollars better?
Traditionally, high interest rates have strengthened the dollar by attracting investments in US bonds and other fixed income assets. Still, US exports are more expensive for foreign buyers who have to pony up more euros to hurt US manufacturers and buy US goods.
Conversely, lower fees generally weaken the dollar and boost US manufacturers by lowering exports for foreign customers.
Of course, lower fees generally raise the economy by shaving the borrowing costs and stocks of consumers and businesses.
“It’s a much more exciting effect,” said John Canavan, lead financial analyst at Oxford Economics, about interest rate cuts, including making US exports more attractive overseas.
Does lower interest rates mean more investment?
Market-friendly interest rate policies can mean a more attractive investment environment.
“Investors are diversifying away from the US, and the ECB’s move (June 5) will only strengthen that,” said Nigel Green, CEO of financial advisory firm Devere Group.
But there are some big warnings.
Why is the US dollar down?
Despite the relatively high Fed interest rates, the dollar has weakened this year against the euro and other currencies. That’s because investors fled US assets amid the uncertainty created by Trump’s repeated off-agene tariffs and Congressional Budget Office.
“We’re still seeing the dollar weak despite the ECB continuing to lower rates,” Canavan said.
In other words, if Trump wants soft dollars to bolster his exports, he has already achieved that goal with his economic policies.
Barclays US economist Jonathan Miller said the Fed rate reduction could drop even further.
However, he added, “If the Fed starts cutting, it will weaken the dollar (interest rate). The dollar is already weak.”
“There’s a lot more going on,” he added. “Trade policy is the most important thing for the dollar. People are very concerned about risk.”
What does weak dollar mean for imports?
Weak dollars are exporting, but it has the opposite effect on imports, making foreign goods more expensive for American retailers and manufacturers.
“For US importers, that’s a disadvantage,” said Andy Schneider, senior economist at BNP Parisbus. “They have to pay more.”
And since businesses usually pass the costs to consumers, that would mean even higher costs for Americans who are already expected to suffer from additional tariff costs, Schneider said.
So, if the Fed launches a reduction rate, he said, could further exacerbate the cost burden that U.S. shoppers are likely to face in the coming months.
Canavan opposed, saying that lower rates would significantly increase the economy, raise wages and give households a place to buy more expensive foreign goods.
Is inflation higher in Europe or the US?
Apart from the impact on the dollar, Trump may be pointing to the eurozone as a benchmark for how the US should handle interest rate policies as inflation eases after the pandemic.
But the US and the eurozone are in very different locations, the economist said.
In May, the US had an overall inflation rate of 2.4%, still exceeding the Fed’s 2% target, and 1.9% in the eurozone below the ECB’s similar target.
And the US economy is stronger. This means that interest rate cuts will result in less support from policymakers. From the fourth quarter of 2023 to the fourth quarter of 2024, the US economy rose 2.5% in the eurozone.
Oxford Economics expects the eurozone to grow by 0.6% this year, almost half of the 1% expansion in the US forecast
Conclusion: The ECB has the flexibility to trim the rates as it is a more persuasive reason to cut due to lower inflation and more intense economies.
“Inflation in the US is somewhat high and US economic growth is particularly strong,” Canavan said.
Rate cuts can cause the economy in the short term, leading to higher inflation and more significantly hinder the economy in the long term, according to Canavan.
“It’s not really race,” Canavan said of different interest rates in the US and the eurozone.
Added Millar: “It doesn’t have to be about winners or losers.”