Interest rates remain steady by Federal Reserve amid concern over potential price inflation
In a refreshing twist, let's chat about the current economic drama unfolding between the Federal Reserve and President Trump. On Wednesday, the Fed kept its interest rate steady, bucking Trump's demands to lower borrowing costs and acknowledging that the risks of both higher unemployment and inflation have creeped up. This peculiar mix of economic woes puts the central bank in a tough spot, and if these high tariffs stick around, they could trigger a dreaded eighth wonder of the economic world—stagflation.
Remember stagflation? It's a terrible cocktail of rising price levels and high unemployment, a combo that makes for some sleepless nights for central bankers. We last saw it during the oil shocks and recessions of the 1970s. Most economists agree that Trump's tariffs do pose the threat of stagflation, as they could both pump up inflation with imported goods becoming costlier and cause unemployment to rise as costs climb for businesses.
The Fed's mission is simple: keep prices stable and maximize employment. Traditionally, when inflation rises, the Fed increases rates to slow down borrowing and spending and cool inflation. On the flip side, when unemployment rises, the Fed drops rates to spur more spending and growth. But as the economy hums along, the Fed decides to hold tight.
Earlier this year, folks were predicting the Fed would slash its key rate two or three times this year, but Powell insists that the economy is in a good groove for now, so the Fed can stay on the sidelines. Some economists also think the Fed should cut rates in anticipation of slower growth and higher unemployment from the tariffs, but Powell firmly stands his ground.
Sadly, the dreams of a perfect "soft landing," in which inflation would sink back to the Fed's 2% goal while unemployment remains low, seem less likely now. The Chairman admitted on Wednesday that if the tariffs are fully implemented, there's no sign of progress towards the Fed's goals… at least for the next year.
The Fed's next move will hinge on which indicator takes a bigger nosedive: inflation or unemployment. It could include rate cuts, but only after the situation unfolds. Meanwhile, Trump continues to put pressure on the Fed to lower rates, but Powell insists the Fed is only taking economic data into account, and they're not swayed by the President's demands.
It remains to be seen what the long-term impacts of these tariffs will be, but one thing's for sure: this tug-of-war between the Fed and Trump could escalate into a full-blown economic showdown. Keep your eyes peeled!
Further Reading:
Is Trump softening his plans for 100% movie tariffs?
Ford braces for a €1.39bn hit from Donald Trump's tariffs in 2025
Is Trump sabotaging the dollar - and what does it mean for the euro?
Jerome PowellFederal ReserveDonald Trump
- Jerome Powell, the Federal Reserve chairman, insists that he is only taking economic data into account and not swayed by President Trump's demands to lower interest rates.
- In a general-news article, concerns about the potential impacts of Trump's proposed 100% movie tariffs are discussed.
- Ford expects to incur a €1.39bn hit from Donald Trump's tariffs in 2025, as mentioned in a business article.
- There are debates about whether President Trump is intentionally devaluing the dollar, as suggested in a finance-related piece, and its possible repercussions for the euro.
