Donald Trump’s tariffs have helped nudge Europe’s central bank into cutting interest rates further—action the U.S. president has been demanding of the Federal Reserve.
President Trump has heavily criticized the Fed for not cutting rates fast enough, even calling on its chair, Jerome Powell, to be fired.
Yet Powell on Wednesday suggested the Fed will go slowly in part because of uncertainty around Trump’s tariffs, saying: “Unemployment is likely to go up as the economy slows, in all likelihood, and inflation is likely to go up as tariffs find their way and some part of those tariffs come to be paid by the public. So that’s the strong likelihood.”
Central banks typically lower interest rates when an economy slows down, in an effort to encourage spending and revive economic activity. Interest rates are often raised to help reduce consumer spending and fight inflation.
Across the Atlantic, meanwhile, the European Central Bank (ECB) announced its seventh reduction—from a high of 4 percent last year—in 10 months last week. The new 2.25-percent rate goes into effect from Wednesday.
ECB president Christine Lagarde cited U.S. tariffs on EU goods as a significant reason behind the latest drop. “The major escalation in global trade tensions and the associated uncertainty will likely lower euro area growth by dampening exports,” she said.
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Why It Matters
On interest rates, the ECB and the Fed appear to have moved in opposite directions as the central banks navigate the as-yet-unknown impact of Trump’s new tariffs.
Both are likely to be wary following a long battle to overcome surging inflation.
What To Know
The ECB cut its main interest rate by 25-basis points to 2.25 percent on Thursday, saying that while the euro area “has been building up some resilience against global shocks,” its outlook for growth “has deteriorated” because of “rising trade tensions.”
EU goods imported to the U.S. are currently subject to the 10 percent baseline tariffs announced by Trump on April 2, and came into force a few days later. The bloc was initially expected to be hit by 25 percent tariffs, but Trump paused these extra levies for 90 days earlier this month.
According to the ECB, “increased uncertainty is likely to reduce confidence among households and firms, and the adverse and volatile market response to the trade tensions is likely to have a tightening impact on financing conditions.”
This same uncertainty around the impact of the Trump administration’s tariffs appears to be stopping the Fed from cutting rates, according to Powell—to the president’s dismay.
The Fed has cut its key interest rate three times in the past year, lowering it from 5.5 percent to the current 4.5 percent as inflation stabilized after years of spiking during the pandemic. But further cuts expected this year have so far failed to materialize.
On Wednesday, speaking at the Economic Club of Chicago, the Fed chair said that the goal of the central bank remains to keep inflation under control while waiting for greater clarity on the impact of tariffs.
“Our obligation is to keep longer-term inflation expectations well anchored to make certain that a one time increase in the price level does not become an ongoing inflation problem,” Powell said.
U.S. inflation fell more than expected to 2.4 percent in March. The Fed has a long-term target of 2 percent.
He added: “We may find ourselves in the challenging scenario in which our dual mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal, and potentially different horizons over which those respective gaps would be anticipated to close.”
Trump blasted Powell on Thursday for not lowering U.S. interest rates, writing on his social media platform Truth Social that his “termination cannot come fast enough.”
What People Are Saying
U.S. President Donald Trump wrote on Truth Social on Thursday: “The ECB is expected to cut interest rates for the 7th time, and yet, ‘Too Late’ Jerome Powell of the Fed, who is always TOO LATE AND WRONG, yesterday issued a report which was another, and typical, complete ‘mess!’ Oil prices are down, groceries (even eggs!) are down, and the USA is getting RICH ON TARIFFS. Too Late should have lowered Interest Rates, like the ECB, long ago, but he should certainly lower them now. Powell’s termination cannot come fast enough!”
European Central Bank President Christine Lagarde said during a press conference in Frankfurt, Germany, on Thursday: “Euro area exporters face new barriers to trade although their scope remains unclear. Disruptions to international commerce, financial market tensions and geopolitical uncertainty are weighing on business investment. As consumers become more cautious about the future, they may hold back from spending as well.”
What Happens Next
The Fed next meets to discuss the central bank’s interest rate will be on May 6 and 7.
