May 29, 2025 l Manila Bulletin
From what we’ve seen, the second Trump administration wouldn’t exactly tiptoe around US interest rate timing. Just recently, US President Donald Trump called US Federal Reserve Chairman Jerome Powell a “fool” for acting “too late” in lowering the central bank’s benchmark rate; this is just the latest in a string of criticisms where President Trump has taken Chairman Powell to task for keeping interest rates steady this year. The last time the Federal Reserve made a rate cut was in December 2024, when the US Federal Reserve lowered the rate from 4.50 percent to 4.25 percent.
Fed Chairman Powell, never one to back down, swiftly responded to the criticism, saying that the US Fed’s decision to hold off on any interest rate decrease is the right call right now since the economic data paints a picture of a U.S. in pretty good shape. He made it clear that the US Fed wouldn’t budge until the impact of President Trump’s recent tariff policies, particularly on inflation, becomes clear. By the way, Trump’s hike in import tariffs was seen by many as an unprecedented flexing of presidential muscle.
Trump and his inner circle, it seems, have a somewhat unconventional view of world trade, especially when it comes to trade deficits—that gap between what the USA sells and what it buys from other countries. Plenty of economists have pointed out that trade deficits don’t necessarily put the brakes on economic growth. They argue that trade deficits aren’t a sign of national weakness, highlighting, in particular, the US economy which has ballooned to four times its size during this half-century of trade deficits. Still, Trump sticks to his gut feeling that the United States is getting economically mugged by Europe, China, Mexico, Japan, and Canada. He’s convinced he knows where interest rates should be headed, and he’s itching to make a big bet on it and come out on top.
Interestingly enough, Trump has again threatened to escalate his trade war, floating the idea of a hefty 50 percent tariff on European Union goods starting June 1. He also put Apple on notice, warning he might slap a 25 percent levy on all its imported iPhones. When Trump dropped this latest bombshell, sure enough, US stock indexes and European shares took a hit, the dollar weakened, and yields on US Treasury notes also dipped, all thanks to the anticipated impact of these new tariffs on US economic growth.
Now, monetary policy is basically a toolkit that a country’s central bank uses to manage the overall money supply, encourage economic growth, and implement strategies like tweaking interest rates and adjusting bank reserve requirements. Obviously, it’s not a roll of the dice, so every potential risk needs to be clearly spelled out. Fiscal policy, on the other hand, is another tool, but it’s strictly for governments, not central banks. In the United States, it’s the Federal Reserve Bank that’s in charge of monetary policy, aiming to achieve that dual goal of maximum employment while keeping inflation in check.
When it comes to The Federal Reserve Open Market Committee, which gets together eight times a year to hash out changes to the country’s monetary policies, the aim is to adjust the level of reserve balances, review or tweak short-term interest rates, and chew over related issues that affect both short and long-term interest rates. The Fed, without seeming to worry too much about pushback from elected officials, gets to pick and choose from various interest rates and different timeframes, which it can then measure and justify. The newly-approved rate then becomes the new discount rate that banks will use to lend, more or less, freely. Expansionary monetary policy is geared towards lowering interest rates, which can get business activities humming and, at the same time, boost the job market.
The U.S. Federal Reserve (often just called the Fed) wields a lot of global power because it’s the central bank of the United States, solely responsible for running its monetary policy and keeping its financial house in order, which, let’s face it, directly impacts both the U.S. economy and global financial markets. The Fed manages the total amount of U.S. dollars floating around, including dollar substitutes, giving it a platform to influence the amount of money in circulation. Given that the U.S. dollar is the world’s go-to reserve currency, any move the Fed makes on the dollar sends ripples across global economies and international capital markets.
As Warren Buffett, widely seen by TIME magazine as one of the sharpest investors around and a beacon of honesty and wisdom in finance, often put it, “America doesn’t avoid problems. It just solves them.”
***The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as FINEX. For comments, email abelardo.cortez7@gmail.com. Photo is from Pinterest.