What's happened
As of mid-July 2025, President Donald Trump has intensified pressure on Federal Reserve Chair Jerome Powell to cut interest rates, despite inflation remaining above target and tariffs threatening to raise consumer prices. Trump’s announcement of new tariffs on key trading partners, including the EU and Mexico, complicates the Fed’s policy decisions. Markets remain cautiously optimistic but face risks from tariff-driven inflation and political interference in monetary policy.
What's behind the headline?
Fed Under Political Pressure
President Trump’s repeated public attacks on Fed Chair Jerome Powell and calls for steep interest rate cuts reflect a broader attempt to politicize monetary policy. Trump’s insistence on lower rates, despite inflation hovering near 3%, risks undermining the Fed’s independence and credibility.
Tariffs Complicate Monetary Policy
The tariffs imposed on trading partners like the EU, Mexico, Japan, and South Korea are expected to increase consumer prices with a lag, complicating the Fed’s dual mandate. While the labor market shows signs of softening, inflationary pressures from tariffs create a rare policy dilemma: cutting rates could fuel inflation, while holding rates risks slowing growth.
Market Sentiment and Risks
Markets have so far responded positively to upbeat earnings and low jobless claims, but the looming tariff overhang and political interference in the Fed inject uncertainty. Investors remain hopeful Trump will eventually ease tariff threats (the “TACO trade”), but the risk of inflation spikes and disrupted trade relations persists.
Outlook
The Fed will likely maintain a cautious stance, waiting to assess tariff impacts before adjusting rates. However, ongoing political pressure and tariff escalation could destabilize markets and inflation expectations. The coming months will test the resilience of US monetary policy and economic growth amid these intertwined challenges.
What the papers say
Bloomberg highlights the market's resilience amid upbeat earnings and inflation below 3%, but notes the tariff overhang and Trump’s threats to fire Powell as risks. The Independent’s Eric Garcia details Trump’s personal attacks on Powell and the administration’s use of Fed building renovation overruns as a pretext to challenge his leadership. Business Insider UK explains the Fed’s dilemma balancing inflation control with a cooling labor market complicated by tariffs, quoting former Fed economists on the lagged inflation effects of tariffs. The New York Times warns that politicizing the Fed risks economic instability, citing experts who fear Trump’s demands for rate cuts tied to government debt costs could lead to chronic inflation. Business Insider UK also reports on Trump’s stalled trade negotiations and the challenges of imposing high tariffs on key partners, emphasizing the complexity of achieving meaningful trade deals. Together, these sources paint a picture of a Fed caught between political pressure, tariff-driven inflation risks, and market expectations, with significant implications for US economic stability.
How we got here
Trump’s administration has imposed tariffs on multiple countries since 2024, aiming to reduce trade deficits. Powell, nominated by Trump in 2018, has resisted cutting rates prematurely, citing inflation risks and tariff uncertainties. Trump’s public criticism of Powell and threats to fire him over budget overruns at the Fed’s headquarters have escalated tensions. The Fed balances inflation control with supporting a cooling labor market amid tariff pressures.
Go deeper
- What are the risks of Trump firing Fed Chair Jerome Powell?
- How do tariffs affect inflation and the Fed's interest rate decisions?
- What is the market's reaction to Trump's trade policies and Fed pressure?
Common question
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How Are Global Events Impacting Financial Markets Today?
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Why Is Trump Threatening New Tariffs Now?
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