The ongoing battle between the Federal Reserve and the White House
The battle between the White House and the Federal Reserve over lowering interest rates continues. Both sides accuse each other of obstructing this process and present their own arguments. Jerome Powell, the Chairman of the Federal Reserve, has stated that the tariffs imposed by Donald Trump’s administration have prevented interest rates from being lowered, arguing that reducing rates could fuel inflation. Trump had previously criticized Powell for failing to lower interest rates.
The reality is that during Donald Trump’s presidency, aggressive trade policies — particularly widespread tariffs on imports from various countries, especially China — were a key feature. These policies not only triggered international trade tensions but also had significant impacts on the U.S. domestic economy, including the Federal Reserve’s monetary policy and, as a result, interest rates. While it was expected that such policies, by creating inflationary pressures, would hinder the Federal Reserve from cutting rates, there were additional complexities involved.
The primary goal of these tariffs was to protect domestic industries and reduce the U.S. trade deficit. However, the increased tariffs led to higher import costs for American consumers and manufacturers. Naturally, these higher costs contributed to rising prices for goods and services — in other words, inflation.
Under its mandate, the Federal Reserve is obligated to raise interest rates or refrain from lowering them when persistent inflationary pressures are observed in order to keep inflation in check. Therefore, Trump’s tariff policies potentially served as an obstacle to the Fed’s efforts toward monetary easing and rate cuts.
On the other hand, tariffs could also negatively impact U.S. economic growth. Higher import costs, reduced exports due to retaliatory measures from other countries, and the uncertainty created among businesses could all lead to slower economic growth.
In times of recession or economic slowdown, the Fed typically favors cutting interest rates to stimulate economic activity. This created a policy dilemma: tariffs increased inflationary pressures, pushing for higher rates, while at the same time, the economic slowdown caused by tariffs increased pressure for lower rates.
Another important factor to consider here is the dominance of uncertainty and ambiguity in U.S. financial markets during this period. Trump’s tariff policies were unpredictable and accompanied by ongoing tensions. This uncertainty made investors and businesses hesitant to make long-term decisions.
The Fed, too, found it more challenging under such circumstances to forecast economic trends and to determine appropriate monetary policies. In such an environment, decisions on rate cuts or hikes became more complicated, prompting the Fed to act more cautiously and to refrain from major rate cuts until a clearer economic outlook emerged.
The trade war had varying impacts across different industries. Industries reliant on imported raw materials faced rising costs, while some domestic industries competing with imports may have benefited from tariff protections. This uneven distribution of impacts made the Fed’s overall assessment of inflation and growth more difficult, potentially influencing its willingness to cut rates.
Donald Trump repeatedly urged the Federal Reserve to cut interest rates, arguing that his policies to stimulate the economy required lower rates. These political pressures could influence the Fed’s decisions, despite the institution’s formal defense of its independence in monetary policymaking.
Nevertheless, such pressures could shape market perceptions about the future path of interest rates and thus contribute to the Fed’s reluctance to reduce them. In any case, the Federal Reserve preferred to act cautiously in this field and refrained from major rate cuts compared to what might have been expected under normal circumstances. On this basis, Trump even called for the dismissal of the Federal Reserve’s chairman.