Fed's Powell Emphasizes Patience Amid Trade Policy Uncertainty

Federal Reserve Chairman Jerome Powell, during a recent press conference, emphasized the central bank's cautious approach to monetary policy, using the word "wait" 22 times to underscore the Fed's patience. Powell's remarks highlighted the divergence in monetary policies between the U.S. and other advanced economies, largely due to the unpredictable trade policies of the Trump administration.

Powell's comments revealed the impact of Trump's unpredictable and fluctuating trade statements on the monetary policies of the U.S. and other wealthy nations. The primary reason for this divergence is that other economies have not imposed significant tariffs on imports, leading them to experience softer demand and weaker labor markets without the inflationary pressures that the Fed may face later this year.

The Fed's officials believe that, given the recent period of high inflation, they cannot afford to preemptively lower interest rates to mitigate slowing hiring, as this could exacerbate short-term inflationary pressures. This approach differs from 2019, when the Fed cut rates three times to support the economy amid the first round of Trump's trade wars.

Powell stated, "In this situation, we cannot act preemptively because we do not know the correct response to the data until we see more of it." As a result, the Fed's position contrasts with that of the European Central Bank, the Bank of Canada, and the Bank of England. Powell suggested that the Fed would only cut rates if it sees clear evidence of a significant economic slowdown, and such a move could come swiftly.

In the latter half of 2024, as inflation rates decline and unemployment rises, the Fed reduced its benchmark short-term interest rate by one percentage point. Since December of last year, the Fed has kept the federal funds rate stable at around 4.3%. In contrast, the European Central Bank has cut its benchmark rate seven times over the past year, totaling a 1.75 percentage point reduction, bringing it down to 2.25% last month. Economists and investors anticipate that the Bank of England will lower its benchmark rate, currently at 4.5%, by at least 25 basis points this week. The Bank of England has reduced its benchmark rate by 25 basis points three times since last summer.

Neil Dutta, the chief economist at Renaissance Macro Research, noted that Europe's economy was not particularly robust to begin with, giving them more reason to worry about the impact on economic growth. Just before the European Central Bank's rate cut last month, Trump sharply criticized Powell for moving too slowly on rate cuts, suggesting that the Fed should follow the European Central Bank's lead. Trump's frustration with the differing approaches of the Fed and the European Central Bank underscores the differing impacts of tariffs on their respective economies. Dutta explained that "no one told him that tariffs affect them differently than they affect us, because they do not have to worry about the inflationary consequences of tariffs, while the Fed does."

Some Fed officials have also expressed concern that cutting rates before the economy weakens could exacerbate price pressures in the short term. Regarding the Fed's rate cuts, Dutta said, "We are just waiting for companies to lay off workers." He expressed concern that the inflation risk posed by tariffs could make the Fed overly complacent about labor market risks.

Economists at JPMorgan predict that the Fed will cut rates in September. Goldman Sachs expects the Fed to begin cutting rates three times starting in July. They anticipate that the European Central Bank will continue to cut rates by 25 basis points until September, bringing its target rate to 1.5%. The inflation rate in the eurozone was 2.2% in April, while the U.S. inflation rate was 2.3% in March. Both the European Central Bank and the Fed aim for a 2% inflation target.

Jan Hatzius, the chief economist at Goldman Sachs, suggested that the European Central Bank's rate cuts could be larger than anticipated. The core inflation rate in Europe, excluding volatile food and energy prices, could drop by 0.5 percentage points. Hatzius noted, "This is a significant figure because it is the difference between being moderately above 2% and moderately below 2%. If Europe's inflation rate ultimately falls below 2%, you could convince many hawkish members of the committee to provide more rate cuts."