Trump’s Trade War Raises Bar for Fed Rate Cuts

The global commercial war of President Trump has significantly increased the level for the Federal Reserve to reduce interest rates, since the tariff risk has worsened an already nodous inflation problem, also damaging growth.

Jerome H. Powell, The Fed chair, I brought home that message In a highly anticipated speech that arrived at the end of a turbulent week while the financial markets melted after Mr. Trump’s tariff plans have been revealed.

The measures would lead to greater inflation and slower growth than initially expected, Mr. Powell warned during an event in Arlington, Virginia, Friday. He showed concern for acid economic prospects, but his emphasis on the potential inflationary effect of the new rates clarified that it was a significant source of anguish.

“Our obligation is to maintain the most long -term inflation expectations well anchored and to make sure that a one -off price increase does not become a problem of inflation in progress,” said Powell. Fed’s mandate includes two objectives, promoting a healthy job market and keeping low and stable inflation.

Before the return of Mr. Trump to the White House, inflation was already proving stubbornly stickyStaying well above the goal of 2 % of the Fed. Yet the economy had remained considerably resistant, leading the central bank to adopt a more gradual approach to cuts to interest rates that culminated in it by making a reduction break in January. In that political meeting, Mr. Powell established That the Fed would need to see “real progress on inflation or, alternatively, a little weakness in the labor market” to restart the cuts.

But with the inflation set to go up because of the rates, it will take tangible evidence that the economy is weakening significantly to make the central bank stand out. This could mean that rates are pushed outside up to the end of the year or even delayed until next year if that deterioration takes time to materialize.

“They will not be inclined to be quotes to cut the rates to avoid what could be a recession,” said Richard Clarida, former vice president of the Fed who is now the global economic councilor of Pimco, an investment company. “In reality they will have to see a real crack in the labor market.”

Clarida said that it will seek an “material” increase in the unemployment rate or a “very acute slowdown, if not a contraction” in the monthly growth of the work to explain what she expected would be a higher significant place in inflation.

The latest employment relationship, which was issued on Friday, showed that on the eve of the last tariff blitz of Mr. Trump, the labor market was Far from cracking. The employers added 228,000 jobs in March and the unemployment rate marked up to 4.2 percent when participation in the labor market has increased.

Any enthusiasm for the latest data has been quickly overcome by A stream of concern About the economic perspectives: the concerns of the best economic councilors of Mr. Trump have tried to face Sunday.

Kevin Hassett, director of the National Economic Council of the White House, recognized that the president’s approach could exacerbate inflation. “There could be a certain increase in prices,” he said in “this week” of the ABC. But he insisted on the fact that the plan of Mr. Trump in the end would have reversed a long -lasting trend to import low cost products in exchange for job losses.

“We got the cheap goods in the grocery store, but then we had fewer jobs,” he said.

Scott Besent, the Treasury Secretary, also tried to minimize the prospects of a recession, saying on Sunday “Meet the Press” of the NBC that there would have been an “adjustment process”.

Wall Street economists are much darker for prospects. Many have abruptly increased their chances of recession together with inflation forecasts. Those economists fear that the rates of Mr. Trump, who are a tax on imports, in the end will decide the expense of consumers, will squeeze the profit margins of companies and potentially lead to layoffs that push the unemployment rate of more than 5 percent.

Many in this cohort expect the Fed quickly to lower interest rates, starting from June. Futures markets on federal funds reflect an even more aggressive response, with five cuts to a quarter of prices for this year.

Michael Feroli, head of the American economist by JP Morgan, asks for a recession in the second half of this year, with a growing growth of 1 % in the third quarter and another 0.5 percent in the fourth quarter. During the year, it provides that growth will decrease by 0.3 percent and the unemployment rate will rise to 5.3 percent. Even if the caliber of Fed’s favorite inflation – once the food and energy volatile prices are eliminated – increase to 4.4 percent, Mr. Feroli provides that the Fed will restart the cuts in June and therefore the lesser costs in each meeting until January until the political rate reaches 3 %.

Jonathan Pingle, the chief economist of the UBS United States, this year has made a pencil in a percentage point of cuts even if the basic inflation reaches 4.6 percent. He expects the unemployment rate to recover this year before reaching 5.3 percent in 2026. The economists of Goldman Sachs expected that the Fed would give three consecutive cuts to a quarter starting from July.

But there are credible risks to this perspective. The prevalent is that the shock of inflation will be too huge for the Fed to look at it beyond the summer, especially if the economy has not yet deteriorated significantly.

“The burden of the test is now higher due to the situation of the inflation in which we find ourselves,” said Seth Carpenter, a former Fed economist who is now in Morgan Stanley. “They must get enough information that convince them that the negative effects of slowdown – and possibly negative – growth exceed the cost of inflation.”

Carpenter said he did not expect any cut from the Fed this year, but plus next year, bringing interest rates between 2.5 % and 2.75 percent. Lhmeyer’s economists, a research company, have also set aside cuts this year, assuming that there is no “full -blown” recession.

Perhaps the most important decisive factor of when the central bank will restart the cuts to rates is what happens with inflation expectations. Over a year, the expectations have remained stable in some way, apart from some measures based on surveys that are considered less reliable than others.

If these expectations begin to oscillate in a more remarkable way, the Fed would become even more hesitant to cut and would need to see even more economic weakness than usual, said William English, professor of Yale and former director of the division of the monetary affairs of the Fed.

Eric Winograd, an economist of the Investment Company Alliancebernstein, said that on Friday the posture focused on Powell’s inflation would have helped to avoid this result. “The name of the game is: you speak hard,” he said. “Keep the inflation expectations where they are and, doing this, preserve your ability to facilitate later if necessary.”

A taller bar for interest rates cuts could put the Fed in a harder point with the Trump administration, said English. Until last week, the president had been more subjected in his criticisms of the central bank, compared to his first term. He had asked for lower interest rates, but tried to justify them by indicating his plans to reduce energy prices, among other reasons.

But how the route in the financial markets has intensified, Mr. Trump he turned his anger Back to Mr. Powell and Fed. Monday, Mr. Trump He said the “slowdown” Fed should cut rates. At a certain point, the president seemed to suggest that the market route was part of his strategy. Him circulated a video From a user on the social media network of Mr. Trump who suggested that the president was “on purpose by crashing” the markets in part to force the Fed to reduce interest rates.

On Sunday, he replied to the issue, Hassett of the National Economic Council replied saying that the Fed was independent, before adding: “He is not trying to tangue the market”.

Mr. Trump has already sought Screen In the long independence of the central bank from the White House, targeting the supervision of the Wall Street Fed. His decision last month to fire two democratic commissioners of the Federal Trade Commission is also widely reverberated, raising important questions about the type of authority that the president has on independent agencies and on the staff who manage them.

At Friday, Powell declared that he fully intended to serve all his mandate, which ends in May 2026. Previously it was also explicit that early removal by the President “is not allowed by law”.

“The risk for the independence of the Fed is now bigger,” said English, the professor of Yale. “He simply puts them in the line of fire.”