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Trump’s Trade War Complicates Path for Fed to Cut Rates

New tariffs throw Fed’s interest rate plans into doubt.

by Rose Fernanda
5 months ago
in Politics
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Powell warns trade penalties could fuel inflation (Photo: Jerome Powell/iStock)

Powell warns trade penalties could fuel inflation (Photo: Jerome Powell/iStock)

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President Trump’s decision to start a new wave of trade penalties has made it harder than ever for the Federal Reserve to consider lowering interest rates. The reason is that the tariffs are expected to worsen inflation while also putting pressure on economic growth.

Jerome H. Powell, who leads the Federal Reserve, strongly delivered this point in a highly anticipated speech that came at the close of a rough week. That same week, markets dropped heavily after the new tariffs were made public by the Trump administration.

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Speaking at an event in Arlington, Virginia, on Friday, Powell warned that the proposed trade measures could lead to both faster price increases and slower economic expansion than what had earlier been predicted.

His message showed concern about where the economy is heading, but he focused more on how the tariffs might make inflation harder to control.

“The job we have is to make sure inflation expectations don’t rise too high in the long term and to prevent short-term price increases from turning into a lasting inflation problem,” Powell said. The Federal Reserve works with two main goals, helping the labor market and keeping inflation low and stable.

Price Worries Grow While the Fed Stays Cautious

Even before Trump stepped back into office, inflation had already been higher than the 2 percent level the Federal Reserve aims for.

Yet the country’s economy had shown strength, which led the central bank to slow down its pace on cutting rates, choosing instead to pause in January.  At that time, Powell made it clear that the Fed would only resume lowering rates if inflation showed serious signs of improvement or if job market weakness became obvious.

But since the new tariffs are likely to push prices even higher, the Fed may now need hard evidence of major economic troubles before making any move to reduce interest rates again. That could mean no rate cuts for the rest of this year, or possibly none at all until next year, depending on how things unroll.

Richard Clarida, who once served as the Fed’s vice chair and now advises PIMCO, a major investment firm, said the central bank would not act quickly to prevent a possible slowdown.

Instead, he said, the Fed would wait until real damage shows up in the economy.  “They will need to see something like a real problem in the job market,” he said.

Clarida explained that he would look out for a meaningful increase in unemployment or a sharp drop in the number of new jobs created each month. That would help confirm what he believes will be a strong jump in inflation driven by the tariffs.

Latest Jobs Data Doesn’t Show a Weak Labor Market

The newest jobs numbers, released Friday, showed no clear signs of trouble in the labor force. Right before Trump announced his latest wave of tariffs, employers added 228,000 jobs in March. The jobless rate rose slightly to 4.2 percent, but this happened as more people returned to look for work.

Although the numbers seemed encouraging, positive reactions to the jobs report were quickly replaced with new worries about where the economy is heading next. These concerns were serious enough that White House economic officials came forward to calm public fears on Sunday.

Kevin Hassett, who leads the White House National Economic Council, admitted that Trump’s trade actions might lead to higher prices. Speaking on ABC’s “This Week,” Hassett said, “There might be some increase in prices.”

But he argued that the president’s strategy is meant to undo a long history where the United States accepted cheaper foreign goods in exchange for job losses at home.

“We got the cheap goods at the grocery store, but then we had fewer jobs,” Hassett stated, trying to explain the thinking behind the trade policy.

Rate cuts less likely as prices threaten to climb (Photo: Donald Trump/Flickr)

Administration Tries to Control Public Concern

Treasury Secretary Scott Bessent also gave his thoughts during an interview on NBC’s “Meet the Press.” He said the changes would come with a period of adjustment but rejected the idea that a major downturn was around the corner.

At the same time, economists working at major banks and research firms are not nearly as hopeful. Many of them have increased their predictions that the country could face a recession soon. They also believe inflation is going to get worse.

These experts worry that the tariffs, which function like a tax on imported goods, will reduce how much consumers are able to spend and shrink profits for businesses. That might lead companies to lay off workers, which would increase the unemployment rate above 5 percent.

A large number of these economists think the Federal Reserve will be forced to act quickly by cutting interest rates, possibly starting in June. Investors who trade on rate expectations are even betting on a more aggressive pace. Right now, market predictions include five separate cuts of a quarter-point each for the rest of the year.

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Rose Fernanda

Rose Fernanda

Rose Fernanda is a dedicated news writer with a strong focus on entertainment, politics, and sports. She has a deep understanding of current affairs and a talent for breaking down complex issues in a way that keeps readers engaged. Her work is well-researched, balanced, and aimed at giving people the right information to stay updated. Whether it is the latest in politics, major sporting events, or trending entertainment stories, Rose ensures her reports are clear, factual, and timely.

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