The US Federal Reserve FED broke the demands of President Trump again after interest in interest. This also demonstrates her independence – only at what price?
The currency keepers around Fed boss Jerome Powell left the key interest rate last night in a unanimous decision in the range of 4.25 to 4.50 percent. That sounds not very exciting at first. But in this doing nothing of the US Federal Reserve is an important message.
The elephant in the room is called Trump
Because the big elephant in the room was also Donald Trump at this interest rate decision. The US President had often verbally attacked Powell; Just a few days ago, he pushed the Fed boss again to reduce interest rates. The hesitant approach of the Fed is a thorn in the side of the self -proclaimed “low interest type” Trump (“low interest guy”), since he had promised interest reductions in the election campaign “as they have never seen before”.
At the press conference, Powell then “tried to make no statements that could bring him further criticism”, as Commerzbank trend expert Michael Pfister emphasizes. “He only slipped out of his role once when he pointed out that the FED of fiscal policy has no tips on how to reduce the deficit, similar to how the monetary policy does not hope for any advice from fiscal policy.”
Fed boss demonstrates independence
The FED leader also emphasized that the interjections from the White House had no influence on the work of the central bank: “We are in a good position to wait and have no hurry.” Last but not least, yesterday’s press conference was a demonstration of the independence of the US Federal Reserve. A demonstration that is apparently necessary in view of a President Trump.
The relationship between the FED leader and the US president has been damaged for a long time. Already during his first term, Trump had repeatedly made fun of Powell. Once compared to Trump the Fed chairman with “a golfer who can’t put it”. Another time he insulted the Fed bankers as “fools”.
Is the Fed hesitating only because of Trump for so long?
The exciting question now is: if the FED may act more false, so it is more likely to support higher interest rates than it would do with another president – just to demonstrate her independence? Some economists had recently criticized the US Federal Reserve to repeat the mistakes from pandemic and to hesitate too long with an adaptation of monetary policy, i.e. interest rate cuts.
The fact is: the independence of the US Federal Reserve is a high asset. If you were to doubt or even damage it, the dollars and US state bonds suddenly lose their status as a safe haven. A global financial crisis would be the result.
Double mandate prepares Fed’s headache
Powell should be more than aware of this danger. The problem in front of which the FED is standing: The customs conflict that Trump is listed is not yet reflected in the hard economic data. In March, US consumer prices rose only by 2.4 percent after 2.8 percent in February. The unemployment rate was recently stable at 4.2 percent.
The uncertainty about the economic outlook has increased, the currency keepers said last night. The Fed also causes her double mandate headache, as it should provide both price stability and full employment.
Fed warns of stagflation
Fed boss Powell now explained that because of the tariffs “the risks of higher unemployment and higher inflation have increased” – a toxic duo that is known as a stagflation. So far, this is the most clear warning of a US authority of the damage that Trump’s tariffs could do.
Stagflation is a horror scenario that every central banker would like to avoid. The dilemma for the currency authorities: rising consumer prices would have to combat interest rates, while an economic downturn and increasing unemployment for falling interest.
Next interest step in July?
Experts therefore assume that the FED will continue to drive in sight, i.e. from session to session depending on the new economic data then available. The central bankers expect a guiding interest rate of 3.9 percent on average in 2025. This indicates two small interest steps this year.
According to the Fed Watch Tool of the CME Group, the US Federal Reserve should keep your feet still at the next meeting in June and then reduce interest in July; 56 percent of the market participants are currently assuming. If it comes to this, Trump could sell this interest rate reduction as a personal victory – it is to be hoped that investors will still believe in the global financial markets in an independent US Federal Reserve.
