Trump loves Europe’s rate cuts. Why the Fed should take cover.
The ECB is widely expected to lower interest rates for the eighth consecutive meeting.
President Donald Trump reignited his campaign to get Federal Reserve Chair Jerome Powell to lower interest rates, holding up the European Central Bank as an example of how it should be done.
Well, the ECB is widely expected to lower rates again Thursday for an eighth consecutive meeting, bringing the key rate down by two percentage points since this time last year. The Fed, by contrast, delivered one point of cuts over the course of three meetings starting in September and has been on pause since December.
Trump noted those divergent paths after economic data showed weak U.S. hiring in May—ADP’s private payrolls report showed 37,000 jobs were added in May, down from a revised 60,000 in April.
“‘Too Late’ Powell must now LOWER THE RATE. He is unbelievable!!!" Trump posted on social media. He noted that Europe had already lowered rates more.
The Fed declined to comment when contacted by Barron’s.
To be fair to Powell, the decisions for the ECB may have been more clear-cut, since the effects of macro uncertainty and the impact of Trump’s tariffs are more likely to damp prices in Europe while weighing on economic growth. By contrast, the tariffs may well fan inflation in the U.S. by increasing the cost of doing business.
Inflation in the 20-nation euro area slowed to 1.9% in May, below the ECB’s 2% target. The Fed’s preferred gauge of inflation has been declining but it’s still well above its goal—core PCE came in at 2.5% in April, according to data released last week.
“Weak inflation, the hit to euro area growth from U.S. tariffs on the European Union, and the risk of disinflationary spillovers in Europe from U.S. tariffs on China will see the ECB continue to cut rates," said Nomura economist Andrzej Szczepaniak. He sees the main ECB rate falling to 1.5% from the current 2.25% by September.
ECB President Christine Lagarde will hold a press conference in Frankfurt to explain the decision. The big question is how much further policy makers will be able to lower borrowing costs–some have argued that rates are low enough to not be restrictive to the economy and have opposed dropping them much further.
Markets are pricing in a near certainty that the ECB will bring its key rate to 2% on Thursday, according to LSEG data. The next quarter-point cut from the Fed—bringing the key U.S. rate to 4%-4.25%—isn’t expected until September, the CME FedWatch tool shows.
In any case, if the Fed does lower interest rates later this year, it will be playing catchup with the ECB.
Write to Brian Swint at brian.swint@barrons.com
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