Federal Reserve Chair Jerome Powell played down any impressions Wednesday that the central bank was looking ahead to cushion economic weakness from President Trump’s tariffs by cutting rates.
At a news conference, he used some version of the word “wait” 22 times to underscore how the Fed isn’t in a rush. “The costs of waiting to see further are fairly low, we think, so that’s what we’re doing,” Powell said.
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Powell’s comments, delivered after the Fed agreed to extend its pause on interest rates, laid bare how Trump’s unpredictable and mercurial trade announcements have opened up a divide in monetary policy between the U.S. and its rich-country peers.
The reason for the divergence is straightforward. Those other economies haven’t imposed large tax increases on imported goods. As a result, they are seeing the effects of softening demand and weaker labor markets but without the effects of higher prices that Fed policymakers could grapple with later this year.
Moreover, because the economy has just been through a wrenching period of high inflation, Fed officials don’t think they can risk cutting rates pre-emptively to support a slowdown in hiring lest it add to hotter price pressures in the short run.
That’s different from 2019, when the Fed cut rates three times to shore up the economy from deteriorating sentiment after Trump’s first trade war with China. “It’s not a situation where we can be pre-emptive because we actually don’t know what the right response to the data will be until we see more data,” Powell said Wednesday.
The upshot is the Fed is in a different position from its peers in Europe, Canada and the U.K. Powell suggested the Fed would cut—potentially quickly—only after it saw evidence that the economy was slowing sharply.
The Fed cut its benchmark short-term rate by 1 percentage point in the second half of 2024 as inflation declined and the unemployment rate drifted up. It has held the federal-funds rate steady, at around 4.3%, since December.
The European Central Bank, meanwhile, has cut its benchmark rate seven times in the last year by a combined 1.75 percentage points, to 2.25% last month. The Bank of England on Thursday cut its benchmark rate to 4.25% from 4.5%. It was the bank’s fourth cut since last summer.