After which he his Central bank chiefs chose, made Donald Trump already clear a few times. The current Fed chief Kevin Warsh and its predecessors Jerome Powell Both are “central casting,” said the US President – like something out of a model catalog for well-dressed central bankers.
He therefore expected both of them to dance to his tune. When Powell failed to do so, he publicly called him an “idiot” on multiple occasions; in May he dumped him in favor of Kevin Warsh. The son-in-law of a powerful Trump campaign donor has now left the president hanging: After four hesitant months, Warsh announced on Wednesday that the Key interest rate is being increased for the first time in three years – by 0.25 percent. A further increase is expected to follow this year.
Cheap money, as Trump had always loudly wanted, will not be available any time soon. For Warsh, the fight against inflation is more important, he said; the Inflation At 3.4 percent, it is well above the targeted inflation rate of two percent. Trump was sent a clear message: The entire Fed leadership made it clear that it did not want to be a puppet of politics. Not just Warsh, but the whole thing Board voted for the increase, including the two members appointed by Trump.
“Conspiracy”
For Trump, this is more than an affront; he senses a conspiracy behind it. The Fed decided this “for political reasons” and wanted to “do as much damage as possible.” On Truth Social, he called for an immediate rate cut in all caps.
In fact, the higher interest rates could blow up in his face in terms of real politics. In just under 50 days it will be congress newly elected, and the Republicans are already threatened with losing both chambers – it would then be the end of Trump’s easy government. If the Fed had lowered interest rates, the Republicans would have been helped in the short term: many Americans finance their lives on credit, and lower credit card costs would have been a good campaign stunt. In addition, interest rates on the historically high national debt would also fall.
The fact that the Fed is not complying with this wish shows the dilemma Trump is in. It was he who caused the price rise Iran war and Customs policy fueled the situation in the first place, but he can’t find a political way out of either.
Lose-lose-Situation
If the Fed had complied with his wish, it would not have benefited him economically in the long term: lower interest rates would have fueled inflation even more, the central bankers argue – and that would have made life more expensive for Americans. But the same applies to the increase: the higher interest rates lead to less economic activity and less demand lead, which in turn Wage development dampens. So for US citizens the whole thing is a lose-lose situation.
The rest of the world will feel the effects of the Fed’s monetary policy in a roundabout way. “Such decisions always have an impact on the capital markets,” says Thomas Urleconomist at WIFO. The higher interest rates mean that more international capital flows into the USA, which strengthens the dollar – countries that have borrowed in dollars, for example in Latin America, Africa or Asia, are hit hard.
In Europe, the ECB has taken a similar interest rate direction as the Fed, which is why, according to Url, the euro will not suffer from a strong dollar. However, one could notice a reduced domestic demand in the USA: If Americans buy less, European exporters also feel this. For lower Trade flows From Austria, Trump’s tariffs have already caused problems, says Url: “Exports to the USA have been declining since then anyway.” In July 2024, the US share of total exports was ten percent, but it has now fallen to 6.3 percent.