Federal Reserve Chairman Jerome Powell has not explicitly said that the Fed will cut interest rates in the coming months, but he did leave open the possibility that Trump's actions will necessitate a rate cut.
Powell spoke at the Federal Reserve of Chicago this morning where he made it fairly clear that the Fed does not see Trump's trade war ending anytime soon.
In a brief statement included as part of a speech on broader monetary policy issues, Powell said the Fed was “closely monitoring the implications” of a trade dispute that has, since the Fed’s last meeting, disrupted global bond and equity markets and posed risks to U.S. and world economic growth.
“We don’t know how or when these issues will be resolved,” Powell said. “As always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective.”
If the Fed cuts interest rates in response to Trump's upcoming tariffs on Mexican goods and his additional tariffs on Chinese goods, that may provide a short-term boost to the market but it could be very bad news in the long-term.
Trump has been calling on the Fed to cut interest rates for nearly two years, but if the Fed cuts rates while the economy is still relatively stable, they will have few if any options for responding if an actual economic downturn arrives. The Fed typically responds to a recession by cutting interest rates, but they can't do that if rates are already at or near zero.
I am not an economist, but it seems to me that a decision to cut rates in response to Trump's trade war would delay the pain just long enough to leave the dinner bill for the next presidential administration to pick up. And this obviously wouldn't help average families who can expect to see their costs increase by nearly a thousand dollars this year as the cost of Trump's tariffs are eventually passed down to consumers.