Interest rates hold steady for now, markets still spooked by tariff troubles: CEI analysis

The Federal Reserve has decided once again to keep interest rates steady, likely in response to President Trump’s flurry of tariff policies. CEI senior economist Ryan Young says the Fed made the right call in not choosing an interest rate cut.

“As expected, the Fed held interest rates steady. That is probably the right thing to do in its current no-win scenario caused by President Trump’s tariffs.

“The Fed would typically respond to a shrinking economy with an interest rate cut, which can stimulate economic activity in the short run. The tradeoff to this is higher inflation. Because the Trump tariffs are raising prices on top of inflation that is still above-target, that is not a good option.

“Raising interest rates is typically the way the Fed deals with rising inflation. While tariffs are not strictly inflationary, they are having inflation-like effects on prices throughout the economy. Raising interest rates can help with that, but the tradeoff is a potential economic slowdown. That is not something the Fed wants to risk when the economy is already shrinking, thanks to those same tariffs.

“So, the best thing to do is probably to stand pat on interest rates. While President Trump will likely pressure the Fed to lower rates as he usually does, the Fed should ignore him, as it usually does.

“The biggest risk will come when Fed Chair Jerome Powell’s term expires next May. Markets are spooked that Trump will replace Powell with a yes-man who will lower interest rates on command and set off another round of inflation.

“The intensity of Trump’s social media reaction to Powell’s steady course may have more to do with how markets take today’s interest rate news than the Fed’s action itself.”