Trump's rates put Fed chairman Powell in a 'no-win situation'

Copyright © HT Digital Streams Limit all rights reserved. Nick Timiraos, The Wall Street Journal 5 min Read 09 Apr 2025, 07:31 AM IST Fed faces difficult choices, as Trump’s rates jeopardize the recession and inflation, which complicates rate cut decisions amid rising uncertainty. Summary A trade war binds the Fed’s hands by pushing inflation at the same time that uncertainty grows. Federal Reserve chairman Jerome Powell faces an increasingly horrible task. Economists, business owners and investors bet that the uncertainty created by the sudden launch of President Trump’s major tariff increases, many of which will come into effect on Wednesday, will push the economy closer to a recession by weakening the appointment and spending. It would ask for the rates to cut to pillow any downturn. At the same time, the extent of the tariff increases is likely to result in prices rising significantly for many imported goods, including materials used by domestic manufacturers. It can make central bankers nervous about inflation and argue that they hold rates where they are, despite the fact that they hold the economy and labor market. Former Fed Governor Laurence Meyer said they were in a no-win situation. The congress charged the Fed for keeping inflation low and stable while retaining a healthy labor market. It has been at least 40 years since a president’s policy pushes the Fed’s two mandates into such profound potential tension. “This administration has yielded the worst shock to the Fed, and there is nothing they can do now,” says Riccardo Trezzi, a former economist who fed fed, who runs Geneva-based underlying inflation, a consulting firm. Buyers earning a Nike store in King or Prussia earlier this month. Powell said last week that the central bank does not have to be a rabbit “to lower rates, suggesting that a rate cut is not on the table during the Fed’s next policy meeting, which is on May 6-7. “You will know more … as the months pass. It’s hard to say exactly when you know, but it’s clear that the learning process is going on, ‘he said. For now, investors bet the Fed cutting interest rates later this year, as the negative hit on growth will weaken so badly the price power of the business that will slow inflation to a major initial doll. But the Fed will be difficult to cut rates to prepare the slowdown, because if it manages to compensate the weakness, the increase in inflation may last longer. Fed officials have suggested that they be slower to lower rates than in previous episodes until they see that the labor market weakens meaningfully. “If you are a trapeze artist, you do not leave the platform until you are sure your partner is leaving the platform,” said Vincent Reinhart, chief economist at BNY Investments. Waiting to see the economy weaken and unemployment is rising before the rates decrease will be politically difficult, especially as Trump has already called on Powell to lower interest rates. “It’s very difficult for the Fed to explain to the public” why it should wait, Meyer said. Officials especially note what consumers, investors and businesses expect to happen to inflation over the next few years because they believe these expectations can be self -fulfilling. In some ways, the Fed’s problem seems like a football goaler who has to decide whether to dive to the left and focus on inflation, or address to the right and weaker growth if an opponent takes a penalty. “Maybe they will be happy, and they choose one of the two sides of the mandate, and I will appear to have done the right thing,” says Trezzi. Elias Sabo, CEO of Compass Diversified Holdings, a mid-market business owner, said his portfolio businesses should support a sharp reduction in sales of the uncertainty caused by rates and the price increases he expects to have to go to customers. Sabo, whose brands include food heating system manufacturer Sterno, said: “We have instructed CEOs to reduce costs, to freeze the rent-and this is bad things for the economy, regardless of tariff impact. Share prices. To bring back the US, inflation can be more persistent. One lesson: It can take longer for services prices to adjust higher to a shock for goods prices, Reinhart said. For example, a major run -up to car prices in 2021 and 2022 contributed to the later rise in car insurance prices. In the past few years, jumping in motor prices has contributed to the following increases in ensuring car insurance. In addition, businesses are likely to distribute the cost of price increases for items subject to rates over the broader range of goods or services they sell, which further complicates the decisions of Fed officials. “Of course they see the recession risks, but inflation risk is not for them at this point. It’s really big, honest,” says Trezzi. Central bankers have a final challenge: The rate reduction right now will not be able to address the most important source of uncertainty enterprises. In contrast, between September and December last year, the Fed cut by 1 percentage point, or 100 basis points, to address the concern that too restrictive monetary policy could weaken the job market. Sabo said: “To get 50 to 100 basis points of interest rate relief against the background of this uncertainty is not going to move the needle,” Sabo said. Monetary policy may also be impossible to discuss broader concerns that come to the fore by Trump’s trade war, including that it can easily change in a capital war and eventually be a loss of US economic priority. The yields on the 10-year treasury note this week rose almost 0.27 percentage point to 4.259% Tuesday-a turnaround from the typical “Flight to Safety” dynamics that occur as the risks of a global slowdown. Treasuries have long been seen as the ultimate haven asset. Analysts cited a variety of reasons for the sale in Treasurys, including the fear of tariff-induced inflation that prevents the Fed from cutting aggressively and a global haven exposure to US assets. Trezzi said that the sale in prolonged securities and shares is “deeply worrying. Course cuts also work by stimulating the demand for rate-sensitive sectors of the economy, such as housing and cars. But these sectors are also two that can be heavily affected by rates, which raise the risk that some interest rate cuts can make the economy. The Fed’s stimulus works by financial markets in interest rate-sensitive sectors of the economy, “which is difficult if those markets are disrupted,” says Reinhart, a former senior Fed economist. Write to Nick Timiraos on [email protected], catching all the business news, market news, newsletters and latest news updates on live currency.