How does the Fed react to Trump’s trade war?

The Federal Reserve warned against increasing economic risks when it decided to hold interest rates unchanged in May.

Fed Chair Jerome Powell focused on uncertainty for the world’s largest economy following Trump’s aggressive tariff decisions during his post-Fed meeting speech this month.

Now markets expect two interest rate cuts overall this year, with some even thinking that this is overly optimistic as US inflation is expected to persist at 3.4%.

Bank of America’s strategists say the upcoming Fed’s meeting minutes will shed more light on the central bank’s decision and stance in response to a potential inflationary recession if occurred. 

Barkclay’s analysts also note the markets have forgotten about tariffs fairly quickly with the focus on tariffs, but the overall macro picture is still held to the tariff war dilemma. 

Some analysts dismissed the possibility of the return of the trade war as Trump already showed leniency and desire to normalize the situation as he did with China, and will likely do with the EU.

Inflation Arguments 

Minneapolis Fed President Neil Kashkari said there’s a “healthy debate” in the Fed about whether the inflationary impact of Trump’s tariffs are transient or not.

He himself believes that trade negotiations could take months or years and might include reciprocal tariffs that will impact economic performance and prices.

The White House has called on the Fed to treat any price spike as temporary, with Trump once again calling on the Fed to cut rates, but officials remain wary.

Fed official Chris Waller believes that tariff-induced inflation are transient, and that inflation could settle at 3% if current negotiations proved effective.

Now the Fed awaits its favorite inflation index, the Core Personal Consumption Expenditures index this week, expected to clock in at a 2.5% rise in nApril, down from 2.6% in March.

Crucial second-reading GDP growth data will also be released, after the initial reading showed a 0.3% contraction.

The Fed decided to maintain interest rates unchanged at below 4.5% at the May meeting, after cutting rates by an entire point last fall.

Fed Chair Powell warned the US economy might veer clear off its employment and inflation targets this year, which would be concerning to policymakers. 

Kashkari, at his latest speech, supported his colleague, Beth Hammock, who said that it’s better to be slow on the right path than to be quick on the wrong path.