It is expected that a lot of drama is not expected at the Federal Reserve meeting this week.
With uncertainty in the following impact of President Donald Trump tariffs upon inflation and economy The Fed is expected to leave its key interest rate unchanged for the fourth direct meeting. However, this can return its forecast to only one indicator reduced this year with two inflation problems, says economist Michael Ferralu with Jpmorgan Chase.
It is also a pretty good rate that fireworks will arrive after the Fed declare its decision, believing that President Donald Trump Lombastte and Fed Chairman Jerome Powell, as he has done in recent weeks.
Trump has called for Fed sharply lower performance – strategy that usually juice in the economy and stock market – Referring to the aggressive campaign of the European Central Bank over the last year.
“” Too late “Powell should now reduce the rate,” Trump wrote in Message in social media On June 5, after the disappointing assessment of the work in the private sector of May using the ADP salary processor. “It is incredible !!! Europe fell nine times!”
The European Central Bank, or the ECB, actually reduced its benchmark seven times during Trump’s post, but reduced it the next day.
Do Trump have a sense? Is the Fed Sustainable approach in the economic deficiency compared to the eurozone?
Simply put, do the Fed lose a global race with the ECB to reduce interest rates?
Christina Lagard, the current president of the European Central Bank, sits next to Jerome Powell’s chairman.
In a sense. But not quite.
The Fed lowered its key rate on the interest point late last year after the inflation spike associated with the pandemic mitigated, but has stopped since it expects Trump’s extensive tariffs on inflation and economics.
The Central Bank lowers rates to strengthen the sluggish economy and hiking, or supports them high to give up inflation. But Trump’s tariffs create an extraordinary dilemma for the Fed officials, as it is expected to increase consumer prices, as well as the rise in obstacles, depriving purchasing power.
Meanwhile, the ECB has invariably reduced its benchmark for two percentage points in the last year as the eurozone inflation has decreased and its economy remains anemic.
This leaves its key rate by 2%, more than 2 percentage points below 4.25% to 4.5% and among the largest gaps between the regions in the last memory.
While Trump did not specify why he was experiencing a large gap in tariffs between the US and the eurozone, he was more specific in the past.
In August 2019, after the Fed approved the first of three quarters of point cuts, Trump called for a “at least 1-point reduction, noting that the main short-term speed of Germany was negative.
“We compete with many countries that have a much less interest rate, and we must be lower than them,” Tapeter wrote at the time. He later added: “The strongest dollar in history, very hard in export.”
Traditionally high interest rates strengthen the dollar, attracting investment in US bonds and other fixed income assets. However, it makes us export more expensive for foreign buyers, which should, for example, increase more euros to afford American goods, hurt American manufacturers.
Conversely, lower rates tend to weaken the dollar and increase US manufacturers, making their exports cheaper for customers in foreign countries.
Of course, lower rates also shoot the economy, usually shaving consumers and costs for business and stock borrowing.
“It has. Much more stimulating the effect,” said John Kanavan, a leading financial analyst at Oxford Economics, declared a decrease in rates, including exporting us more attractive abroad.
A more useful interest rate policy can also mean a more attractive investment climate.
“Investors are diversified by the US, and the ECB step (June 5) is likely to only strengthen it,” said Nigel Green, CEO Devere Group, financial consultation company.
But there are some great nuances.
Despite the relatively high interest rates of the Fed, this year the dollar weakened the euro and other currencies. All because investors escaped from US assets against the backdrop of uncertainty, which gave rise to again, which are again tariffs on again, and according to the budget budget in Congress, that the Trump budget plan will add a 2.4 trillion deficit. Dollars.
“Despite the fact that the ECB continues to reduce the rates, we are still seeing a weakening in the dollar,” Kanavan said.
In other words, when Trump is looking for a softer dollar to strengthen exports, he is already reaching this goal with his economic policy.
According to a decrease in the Fed speed, it may reduce the green appeal, said Jonathan Millar, US Senior economist in Barclays.
But, he added: “It is not so clear that when the Fed began to reduce (stakes) that it will weaken the dollar. The dollar is already weak.”
“There are so many other things,” he added. “Trading policy is the most important thing for the dollar. People are just very worried about the risks.”
While the powerless dollar pushes exports, it has an opposite impact on imports, making foreign goods more expensive for American retailers and manufacturers.
“For US importers, this is a drawback,” said Andy Schneider, senior economist BNP Paribas. “They have to pay more.”
And since companies tend to convey to consumers their expenses, it means even higher costs for Americans who are expected to fight additional tariff costs, Schneider said.
Thus, when the Fed begins to reduce the indicators, he said it could connect the load on the cost that US buyers may face in the coming months.
Kanavan disagreed, saying that lower rates would raise the economy, increasing wages and giving the households to afford to provide the price of foreign goods.
In addition to exposure to the dollar, Trump may point to the eurozone as a benchmark for how the US should engage in interest rate policy as inflation facilitates after the pandemic.
But the American and the euro area are in many different places, economists said.
In May, total inflation was 2.4% in the US, still higher than 2% of the Fed target and 1.9% in the eurozone, just below the same ECB goal.
And the US economy is stronger, that is, it requires less support for politicians by reducing the rate. From the fourth quarter of 2023 to the fourth quarter of 2024, the US economy increased by 2.5% against 1.2% per eurozone.
Oxford Economics expects that this year the eurozone will grow by 0.6%, almost half of 1% extension predicts for the US
Essence: ECB has flexibility for pruning because its inflation is lower and more convincingly reduced because its economy is more cunning.
“Inflation in the US was slightly higher, and the US economic growth is much stronger,” said Kanavan, noting that the Fed is also cautious about reducing the rate of Trump’s own tariffs.
While the rate decrease can cause the economy in the short term, it can lead to higher inflation, and the economy is more significantly more significantly, Kanavan said.
“This is not really a race,” Kanavan said of the disparate interest rates in the US and the eurozone.
Millar added: “It should not be about the winners and lost.”
