Donald Trump has urged the Federal Reserve to "do the right thing" and cut interest rates after Chair Jerome Powell announced they would hold steady.
The former president believes lower rates will help smooth the transition to his new tariffs on Canada and Mexico. The United States is set to impose retaliatory tariffs on April 2.
Trump criticized Powell and the Fed in a Truth Social post on Wednesday night, stating, "The Fed would be MUCH better off CUTTING RATES as U.S. Tariffs start to transition (ease!) their way into the economy. Do the right thing. April 2nd is Liberation Day in America!!!"
On that date, Trump plans to implement tariffs aimed at counteracting the import taxes and trade barriers imposed by U.S. trading partners.
Lower interest rates make borrowing cheaper for businesses and individuals, which could boost consumer spending. Trump believes this, combined with his tariff strategy, will drive the U.S. economy to new heights.
Powell confirmed the Fed intends to cut rates twice later this year but not before Trump’s proposed "Liberation Day." Since taking office, Trump has reshaped global trade policy, already increasing import duties on Chinese goods by 20% and imposing 25% tariffs on Canadian and Mexican goods that do not comply with U.S.-Mexico-Canada Agreement trade rules.
Additionally, he has reinstated 25% tariffs on steel and aluminum imports worldwide. The impact of these policies remains uncertain, depending on how quickly tariff-related inflation moves through the economy and whether inflation expectations remain stable.
Powell noted that the recent surge in inflation over the past two months was unexpected, possibly due to consumers stockpiling goods ahead of tariffs. The Fed is monitoring these effects, but uncertainty remains due to shifting trade policies.
The Federal Reserve has decided to keep its benchmark rate between 4.25% and 4.5% but still plans two rate cuts later in 2025. However, officials acknowledge that inflation is not fully under control and have downgraded growth projections, partly attributing these challenges to Trump’s tariffs.
Despite inflation concerns, Powell reassured investors that the Fed remains committed to rate cuts, which lifted U.S. stock markets. The S&P 500 climbed over 1% in afternoon trading, providing relief to 401(k) investors who have endured recent market volatility.
While the Fed’s policy rate does not directly set loan, mortgage, and credit card rates, it strongly influences them. Powell emphasized that the Fed is not in a rush to change its stance, highlighting that inflation forecasts have risen. The Fed now expects inflation to end the year at 2.7%, higher than the 2.5% projected in December, exceeding the central bank’s 2% target.
Economic growth is also expected to slow, with the unemployment rate predicted to rise to 4.4% by year-end. The Fed faces a difficult balance: inflation pressures typically warrant higher interest rates, but slowing growth and rising unemployment would normally call for rate cuts to stimulate spending and investment.
This marks the second consecutive meeting where the Fed has kept rates steady, opting to evaluate the economic impact of Trump’s policies. Economists anticipate tariffs will drive inflation higher in the short term, though deregulation efforts might offset some costs.
Powell acknowledged that tariffs are a "driving factor" in rising inflation expectations. Concerns about these policies have already sent the S&P 500 into correction territory, with stocks falling more than 10% from their recent highs.
Explaining the Fed’s "wait and see" approach, Powell noted that the administration’s policies on trade, immigration, fiscal policy, and regulation will collectively shape the economic landscape.
"It’s the net effect of these policy changes that will matter for the economy and the path of monetary policy," Powell said.
The combination of higher inflation and slowing growth raises fears of stagflation. Economists have increased warnings about a potential recession, citing rising auto loan delinquencies and consumer inflation expectations reaching their highest levels since the 1990s.
The Fed is closely monitoring these expectations, as they can become self-fulfilling. If consumers anticipate higher inflation, they may accelerate purchases, further pushing up prices.
Retailers across the market spectrum report that consumers are becoming more cautious due to expected price increases from tariffs. Retail sales rose modestly last month following a sharp decline in January, reflecting ongoing economic uncertainty.
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