U.S. Economy and Interest Rates

By Howard Schneider and Ismail Shakil

(Reuters) – President Donald Trump warned Monday that the U.S. economy could slow down unless interest rates are lowered immediately. He criticized Federal Reserve Chair Jerome Powell, who believes that rates shouldn’t be reduced until it’s clear that Trump’s tariff plans won’t cause persistent inflation.

Trump stated, “With these costs trending so nicely downward, just what I predicted they would do, there can almost be no inflation, but there can be a SLOWING of the economy unless Mr. Too Late, a major loser, lowers interest rates, NOW…” This statement was made via a post on Truth Social.

His remarks and intensified pressure on Powell, whom Trump has hinted he would like to replace, resulted in a drop in stock markets and a rise in bond yields. Analysts are concerned about the implications if Trump escalates a confrontation with the Fed’s monetary policy independence, especially with Powell’s term ending in a little over a year.

It remains uncertain whether Trump has the authority to dismiss Powell, and even if he did, the Fed’s governance structure might still allow other board members and regional bank presidents to influence interest rate decisions.

Trump’s threats to fire Powell align with his desire for immediate rate cuts to alleviate anticipated economic slowdown and labor market impacts from his tariffs and policies, while Fed officials caution about potential inflation risks, currently above their 2% target.

The Fed is set to meet on May 6-7 and is expected to maintain the benchmark interest rate between 4.25% and 4.50%.

Weaker Economic Outlook

The economic growth outlook is dimming as Trump’s imposition of import taxes escalates, prompting economists to raise recession odds for this year. The Conference Board’s Leading Economic Indicators fell 0.7% in March, suggesting a slowdown in economic activity ahead, as consumer sentiment and manufacturing weaken alongside declining stock prices.

Although inflation might decrease in upcoming readings, there is consensus that the tariffs could push it back above 4% for the rest of the year. Fed officials express concerns that this inflation could linger and necessitate tighter credit conditions.

Chicago Fed President Austan Goolsbee commented that the central bank needs more time to assess the net impact of Trump’s policies, emphasizing a cautious approach. “The impact of tariffs on the macroeconomy could potentially be modest…” he said.

U.S. stock markets declined following Trump’s social media outburst, with the S&P 500 down 2%. Rising Treasury yields present additional challenges as they lead to increased consumer financing rates and tighter credit for companies, which ultimately reflects market trading independent of the Fed’s short-term rate decisions.