The Federal Reserve on Wednesday is widely expected to stabilize interest rates for the fourth consecutive time, but the European Central Bank cut its interest rates for the eighth time in a year.
This disparity has attracted President Trump’s attention. He called Central Bank Chairman Jerome Powell “numbskull” last week, so he did so again.
“We didn’t do anything,” Trump added. “No one understands it.”
The two central banks, the US and Europe, diverge as their economies move in different directions, are affected by other domestic factors as well as tariffs from the Trump administration.
US Federal Reserve Chairman Jerome Powell speaks with Christine Lagarde, chairman of Canada’s European Central Bank on May 20 (Photo: Cole Burston//AFP by Getty Images) ・Cole Burston/ Via Getty Images
Earlier this month, the ECB cut its benchmark interest rate from 2.25% to 2%, the lowest level since early 2023, leaving borrowing costs in Europe below 2% points than the US. It also indicates that the end of the rate cut cycle is approaching.
The Fed cut its final cut rate in December 2024, reaching its target range of 4.25%-4.5%, and has yet to cut its fees during Trump’s second term.
“The president is trying to keep getting more and more angry about it,” said Luke Tilly, chief economist at the Wilmington Trust.
Perhaps the big difference is how the two central banks view inflation. US policymakers hiked inflation forecasts in the spring as they worried about the ultimate impact on Trump’s tariff prices, despite the expected prices not yet rising. The Fed will provide new forecasts this week.
In contrast, in Europe, the ECB has reduced its inflation forecast, predicting inflation to fall to a 2% target this year, before reaching an additional 1.6% next year.
“The European Union is being cut due to low inflation and threats to growth,” Tilly said. “The Fed says it should be reduced or reduced because of low inflation and a threat to growth, but they’re holding a bit here.”
LPL Financial Chief Economist Jeffrey Roach said the Fed is likely to remain in “waiting” mode than the ECB because U.S. consumers are on a stronger footing than their European counterparts, giving the Fed a luxury of time before U.S. policymakers have to act.
“The relatively strong consumer demand means our inflation is a little hotter than in the Euro region,” Roach said. “As the growth outlook weakens in the Euro region, the ECB is becoming more stubborn as it responds to economic pressures in Europe.”
The president of ECB Christine Lagarde warned that trade tensions could lead to greater volatility and risk aversion in financial markets.
Most exports to the US face 10% tariffs, and if the European Union and the US do not enter into contracts by the July 9 deadline of the White House, tax could rise to 50%.
Fragmentation of global supply chains could also raise inflation by boosting import prices and increasing capacity constraints in the domestic economy, Lagarde added.
Unlike the US, European central banks do not have double orders. The ECB is targeting inflation, but the Fed must maintain both stable prices and maximum employment.
This year, Fed Chairman Jerome Powell and many of his colleagues have repeatedly urged patience as they put the Fed in a challenging place, hoping that Trump’s tariffs would increase inflation and reduce growth.
President Trump will speak in the Eastern Room of the White House on June 12th (AP Photo/Alex Brandon) ・Associated Press
However, there is a gap within the Fed later this year about whether they will remain stable for some time or be more comfortable with the cuts as officials try to determine if the inflation that comes from Trump’s tariffs will last longer.
Some policymakers argue that the effects of the obligations will be “see” and “see” as temporary and will leave the door open to cut. However, many pricing committees believe there is a risk that inflation from tariffs could become more permanent.
“If you have the right Fed chair, you’ll lower the fees,” Trump told reporters earlier this week. “And what do you know? If inflation happens now, two years from now, I’ll raise the fees for them.”
The president emphasized that there is a lot of debt in the United States, and lowering interest rates means lower interest expenses in the United States.
“If this guy cuts interest rates, the interest rates go down. It’s incredible,” Trump said. “And he’s worried about inflation.”
The World Bank is expected to raise trade tensions this week, with policy uncertainty expected to drive global growth at 2.3% this year, nearly half the expected percentage at the beginning of this year and its slowest pace outside of 2008.
International organizations said the turmoil has reduced growth forecasts in nearly 70% of all economies. However, a global recession is not expected.
Dustin Reid, chief strategist of Mackenzie Investments, said he has $150 billion in assets under management, and believes that “ECB may need to be lowered a little.” “Taxes will be extremely difficult for the European Union,” Reed said.
On the Fed, Reid believes September will be playing around with the Fed rate reduction.
“I think data on the US labor market is a bit cracking,” Reed said, adding that Powell this week “will have a little open door to keep at least a little July play.”
