Session of the central bank: Trump’s tariff overshade course of the US Federal Reserve Fed

How will the tariffs imposed and threatened by President Donald Trump have an impact on the US economy? The US Federal Reserve concerns this question in its efforts to keep inflation low in the world’s largest economy and to keep the labor market stable. However, the central bank hardly leaves any doubt on two foreseeable consequences of Trump’s tariffs: the prices will therefore increase and growth will weaken.

The Federal Reserve (FED) is on a collision course with Trump, because the Republican always claims that consumer prices would not rise due to its tariffs and that the economy would be booming. Central Bank boss Jerome Powell, whose term of office ends next year, found clear words: “Anyone I know predicts a significant increase in inflation in the coming months due to the tariffs because someone has to pay the tariffs.” That will also meet consumers, he warned.

Powell: tariffs increase inflation, weaknesses growth

“The effects of tariffs will depend on its height,” said Powell. In the meantime, a slightly less high tariffs are expected, but there is a lot of uncertainty. “Nevertheless, increased tariffs will probably drive up prices and burden economic development,” said Powell.

For this reason, too, the US Federal Reserve once again kept its key interest rate stable – despite the vehement claims by the President, to quickly reduce the allocation of lending. The key interest rate remains at a high level of 4.25 to 4.5 percent. The uncertainty about further economic development is still high, it said.

Leist interest as the most important tool of the central bank

The decision corresponded to the expectation of most analysts. After corona pandemic, interest rates in the United States had risen sharply to combat the high inflation. Since then there have been two interest rate cuts in 2024 – but none yet this year.

The key interest rate is the most important control instrument of the central bank to pursue its central goals: limit inflation and keep unemployment low. The key interest rate determines which sentence can borrow money from the central bank. As a result, the key interest rate then influences the fees paid by consumers and companies, for example in mortgages, car loans or other financing.

Lower economic growth expected

This year, the FED is now expecting a lower economic growth than before. The central bank only goes from an increase of 1.4 percent. Already at the previous forecast in March, the FED had corrected its economic expectation downwards, at that time to an increase of 1.7 percent. The central bank also expects a higher inflation rate of 3.0 percent. In March it still assumed an inflation rate of 2.7 percent.

Why does Trump absolutely want lower interest?

The independence of the US Federal Reserve Fed is guaranteed by law. President Trump does not prevent this from regularly demanding lower interest rates in order to additionally boost the economy.

In order to emphasize his claim, he always attacks Powell personally. Just last week, Trump insulted him as a “hollow head”. On Wednesday immediately before the Fed decision, he called Powell “stupid”. Sometimes he also recommends that he take a role model on the interest reductions of the ECB. This has recently reduced the key interest rate to 2.0 percent.

From the point of view of the FED, there is currently no urgent need for action with a view to the amount of the key interest rate: the inflation rate is close to its goal of two percent, and the location on the labor market is also still robust. In addition, the further economic development is very uncertain due to the tariffs.

Since taking office in January, Trump has imposed high import fees on goods from different countries or at least threatened. These make imports into the USA.