Interest rates would have been cut, if not for Trump's tariffs, Fed chair says
Amid a battle with the president, who has been pressuring the Fed to cut interest rates, Powell said they had to re-evaluate their plans for interest rates once inflation forecasts went up after April's so-called 'Liberation Day' tariffs.
'We went on hold when we saw the size of the tariffs, and essentially, all inflation forecasts for the United States went up materially as a consequence of the tariffs,' Powell said while sitting on a panel at the European Central Bank forum.
When asked if the Fed would have cut interest rates by now, had the tariffs not been implemented, Powell said, 'I think that's right.'
Trump has lashed out at Powell for refusing to cut interest rates, calling him 'not a smart person,' and accusing him of making the government spend more money unnecessarily. He's repeatedly attacked Powell online for not following other countries in lowering short-term interest rates. He has even suggested he would 'terminate' Powell – something he cannot do.
On Monday, Trump sent a handwritten letter to Powell, who he often calls 'too late,' claiming he 'cost the U.S.A. a fortune' by not cutting interest rates.
'You should lower the rate – by a lot! Hundreds of billions of dollars are being lost,' Trump wrote on a paper containing the global Central Bank rates.
Lowering short-term interest rates can encourage people to borrow and spend more, which stimulates the economy. It also reduces the amount of interest the government must pay on debt. But it can also increase inflation.
But Powell said the Fed was being 'prudent' by adopting a wait-and-see method when it comes to the impact of tariffs.
The U.S. economy is currently stable with low unemployment rates and declining inflation.
However, Powell said the impact of tariffs could come later this year. He reminded the panel that inflation is behaving the way the Fed initially expected.
'We haven't seen effects much, yet, from tariffs and we didn't expect to by now. We've always said the timing, amount, and persistence of inflation would be highly uncertain,' Powell said.
He added, 'We expect to see, over the summer, higher readings, but we're prepared to learn that it can be higher or lower or later or sooner than we expected.'
Powell did not indicate whether the Fed would cut interest rates in July, saying that they were making decisions based on how data changes.
While Trump can hope for Powell to resign, he can remain Chairman of the Federal Reserve until 2026 when his term ends.
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