President Trump’s own tariff plan may have stacked the deck against his long-awaited interest rate reduction.
According to Fed notes from a meeting held prior to Trump’s tariff announcement, the threat of such policies had already prompted the FOMC to pause. By enacting such policies in recent weeks, the White House may have sealed its own fate.
President Donald Trump has been vocal about his views on Federal Reserve policy, frequently criticising Chairman Jerome Powell and the Federal Open Market Committee (FOMC) on interest rates; however, the president’s own policies are working against a rate cut.
Even before taking office, Trump suggested Powell’s future at the central bank could be jeopardised if he moved to cut interest rates ahead of the election.
More recently, he has taken the opposite position, telling an audience at the World Economic Forum in Davos that he would “demand” lower rates.
The Federal Reserve, on the other hand, is an independent entity tasked with setting monetary policy free of political influence.
While the central bank considers a variety of economic indicators, recent meeting notes from the January session indicate that policymakers continue to prioritise inflation trends and broader economic conditions over external pressures.
These conditions include Trump’s trade policies, which may complicate the case for rate cuts.
According to the Fed’s minutes, officials expect inflation to gradually approach the central bank’s 2% target, but ongoing economic uncertainties may influence future interest-rate decisions.
Slowing wage growth, stable long-term inflation expectations, weakening business pricing power, and the Federal Reserve’s restrictive policy stance are all contributing factors.
Some officials also suggested that the current Federal funds rate of 4.25% to 4.5% may be closer to neutral than previously thought, exceeding Wall Street’s expected 3% baseline.
However, members of the committee also identified factors “that have the potential to impede the disinflation process, including the effects of potential changes in trade and immigration policy, as well as strong consumer demand.”
“Business contacts in a number of districts had indicated that firms would attempt to pass on to consumers higher input costs arising from potential tariffs,” according to the notes.
Unfortunately for Trump, he may have sealed his fate by moving forward with tariff plans since the FOMC’s last meeting.
Trump confirmed a 10% additional tax on Chinese imports in early February, just days after the FOMC met to discuss concerns about the inflationary impact of tariffs.
At the same time, economic sanctions against Mexico and Canada were announced, with each facing a 25% increase in imports, but these were postponed after the countries scrambled to deliver a slew of concessions to avoid the threat.
Similarly, President Trump has floated the idea of imposing 25% tariffs on automobile, semiconductor, and pharmaceutical imports, with an announcement expected as early as April 2—a move that would significantly expand the president’s trade war.
“Participants generally pointed to upside risks to the inflation outlook,” as stated in the notes. “A couple of participants remarked that, in the period ahead, it might be especially difficult to distinguish between relatively persistent changes in inflation and more temporary changes that might be associated with the introduction of new government policies.”
Since the January meeting, the Bureau of Labour Statistics has released a consumer price index report, which analysts predict will make for “very uncomfortable” reading for the Fed. Inflation in January reached a nine-month high of 0.5%.
The results were boosted by rising energy and egg prices, the latter of which has reached an all-time high. The St. Louis Fed, which tracks the cost of a dozen large eggs, reports that prices have reached $4.95.
With this in mind, not only the Federal Reserve, but also consumers, are concerned about rising inflation.
According to the Federal Reserve Bank of New York’s consumer survey, year-ahead commodity price expectations increased across the board in January, rising to 2.6% for petrol (+0.6 percentage points), 4.6% for food (+0.6), and 6.8% for medical care (+1.0).
The employment question
With inflation dominating the economic agenda, it is easy to forget that the FOMC’s mandate includes two parts: keeping inflation at 2% and maintaining maximum employment.
On this count, the FOMC appears to be fairly optimistic. The notes from its meeting stated: “Participants judged that labour market conditions had remained solid and that those conditions were broadly consistent with the committee’s goal of maximum employment.”
The report continued: “Participants also noted that recent readings of indicators such as job vacancies, the quits rate, and labour turnover were generally consistent with stable labour market conditions.”
In light of a volatile inflation environment, this outlook is encouraging.
Economic activity—driven by strong consumer spending and business action—is required to maintain healthy employment levels, and it is frequently aided by relatively low interest rates.
As a result, arguments against tighter monetary policy are frequently used to protect jobs and productivity. On the other hand, lower interest rates can lead to inflation.
The current environment does not appear to present Powell and the FOMC with this choice.
