Trump tariffs: Why is the US President confident of Fed rate cuts despite Jerome Powell’s inflation warning?

Trump tariffs: US President Donald Trump's new tariffs are "larger than expected," and the economic fallout, including higher inflation and slower growth, likely will be, US Federal Reserve Chair Jerome Powell said while warning it was still too soon to know what the central bank's response ought to be.

On the other hand, Trump called for Powell to pursue interest rate cuts, citing lower energy prices, interest rates, and inflation, among other things. “This would be a PERFECT time for Fed Chair Jerome Powell to cut Interest Rates. He is always ‘late,’ but he could now change his image, and quickly,” Donald Trump said in a post on Truth Social, a platform he owned.

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Trump orders Powell to cut rates

Trump ordered Jerome Powell to cut interest rates, which currently range from 4.25 per cent to 4.50 per cent. “Energy prices are down, Interest Rates are down, Inflation is down, even Eggs are down 69 per cent, and Jobs are UP, all within two months - A BIG WIN for America. CUT INTEREST RATES, JEROME, AND STOP PLAYING POLITICS,” Donald Trump wrote in the post.

The US President's comments come after he unveiled a series of tariffs on several nations, a move that economists believe would result in a global economic slowdown. Global financial markets, including the US stock market, have been spooked, shedding over five trillion in investors' wealth.

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Jerome Powell warns of high US inflation, slower growth

Powell spoke as equity markets from Tokyo to London to New York continued a swoon that has wiped some 10 per cent off major US stock indexes since Trump announced new tariffs on trading partners worldwide on Wednesday.

Investors had looked to Powell's speech for reassurance that perhaps the Fed was poised to take supportive actions as it has in previous moments of extreme market duress. However, Trump still took to his social media platform to say now would be the "perfect time" for the Fed to cut interest rates.

"We face a highly uncertain outlook now with elevated risks of a higher unemployment and higher inflation," Powell said at a business journalists conference in Arlington, Virginia, undermining the US Fed's mandates of two per cent inflation and maximum employment.

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Powell did not address the selloff directly, instead acknowledging that the Fed faced the same uncertainty engulfing investors and executives. The S&P 500 Index was down another nearly six per cent, with the Dow Jones Average 5.5 per cent lower and the Nasdaq off five per cent, ending a two-day decline that is the worst since the onset of the COVID pandemic in 2020.

"While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent," said Powell. "We must keep longer-term inflation expectations well anchored and make certain that a one-time increase in the price level does not become an ongoing inflation problem," he said.

Jerome Powell said it was not the Fed's role to comment on Trump's policies but rather to react to how they might affect an economy that he and his colleagues regarded just a few weeks ago as a "sweet spot" of falling inflation and low unemployment.