Federal Reserve Chair Jerome Powell played down any impressions Wednesday that the central bank was looking ahead to cushion economic weakness from President Trump’s tariffs by cutting rates.
At a news conference, he used some version of the word “wait” 22 times to underscore how the Fed isn’t in a rush. “The costs of waiting to see further are fairly low, we think, so that’s what we’re doing,” Powell said.
Powell’s comments, delivered after the Fed agreed to extend its pause on interest rates, laid bare how Trump’s unpredictable and mercurial trade announcements have opened up a divide in monetary policy between the U.S. and its rich-country peers.
The reason for the divergence is straightforward. Those other economies haven’t imposed large tax increases on imported goods. As a result, they are seeing the effects of softening demand and weaker labor markets but without the effects of higher prices that Fed policymakers could grapple with later this year.
Moreover, because the economy has just been through a wrenching period of high inflation, Fed officials don’t think they can risk cutting rates pre-emptively to support a slowdown in hiring lest it add to hotter price pressures in the short run.
Trucks wait to load shipping containers at the Port of Los Angeles last month. – Damian Dovarganes/Associated Press
That’s different from 2019, when the Fed cut rates three times to shore up the economy from deteriorating sentiment after Trump’s first trade war with China. “It’s not a situation where we can be pre-emptive because we actually don’t know what the right response to the data will be until we see more data,” Powell said Wednesday.
The upshot is the Fed is in a different position from its peers in Europe, Canada and the U.K. Powell suggested the Fed would cut—potentially quickly—only after it saw evidence that the economy was slowing sharply.
The Fed cut its benchmark short-term rate by 1 percentage point in the second half of 2024 as inflation declined and the unemployment rate drifted up. It has held the federal-funds rate steady, at around 4.3%, since December.
The European Central Bank, meanwhile, has cut its benchmark rate seven times in the last year by a combined 1.75 percentage points, to 2.25% last month. The Bank of England on Thursday cut its benchmark rate to 4.25% from 4.5%. It was the bank’s fourth cut since last summer.
In Europe, “their economy wasn’t particularly strong to start with, so they have even more runway to just worry about the effects on growth,” said Neil Dutta, head of economic research at Renaissance Macro Research.
Just before last month’s ECB rate cut, Trump sharply criticized Powell for being too slow to cut rates. He said the Fed should follow the example of the ECB.
“Everybody’s cutting but him,” Trump told reporters in the Oval Office on Thursday, referencing the Bank of England’s rate cut. Trump suggested he wasn’t interested in meeting with Powell. “It’s like talking to a wall,” Trump said.
Powell has repeatedly said the Fed makes its decisions based on its own assessment of how to best balance its mandate to promote low inflation and healthy labor markets.
Trump’s frustration over differing courses by the Fed and the ECB suggests that “no one has told him that tariffs affect them differently than they do us, because they don’t have to worry about the inflation consequence of the tariff. The Fed does,” Dutta said.
Some Fed officials have highlighted concerns that cutting rates to pre-empt economic weakness could amplify price pressures in the short run.
Just before the European Central Bank’s rate cut last month, President Trump suggested the Federal Reserve should follow Europe’s example. – Liesa Johannssen/Bloomberg News
For the Fed to cut, “we’re just waiting for companies to lay people off,” said Dutta. He said he feared tariff-induced inflation risks had made the Fed too complacent about risks to the labor market.
Economists at JPMorgan Chase expect the Fed to cut in September. Goldman Sachs thinks the Fed will lower rates three times this year beginning in July. They see the ECB continuing to cut rates in quarter-point increments through September, which would leave its target rate at 1.5%.
Inflation was 2.2% in April for the euro area. It was 2.3% in the U.S. in March. The ECB and the Fed target 2% inflation.
Jan Hatzius, Goldman’s chief economist, said it is possible the ECB will cut even more than the bank forecasts because U.S. tariffs on China could lead to a larger glut of exports from China to Europe. That could reduce European core inflation, which excludes volatile food and energy prices, by 0.5 percentage point.
“That’s a pretty big number because it is sort of the difference between being moderately above 2% and being moderately below 2%,” he said. If inflation in Europe ends up running below 2%, “then you could persuade a lot of the hawkish members of the committee…to deliver more cuts.”
