The Fed under fire, the ECB in uncertainty: Trump makes it difficult for central banks

The enormous unrest that Donald Trump causes thorbs considerably in the boarding rooms of the large central banks.

In Washington the position of Jerome Powell, the chairman of the American Federal Reserve, came under pressure on Thursday: implicitly Trump threatened on his social media channel Truth Social with Powells resignation. The « termination of Powell’s term, » Trump wrote, « can’t come fast enough. » Powell’s period runs until May 2026.

Trump blames Powell to be too slow with interest rates, which the president sees as good for the economy, good for the stock market- and good for his own real estate and crypto thinks. Powell itself has repeatedly said in recent weeks that it is « not allowed under the law » to dismiss him: the FED has an independent position in relation to the government. But the legal protection of Powell is not clear. A possible dismissal should probably be fought for the Supreme Court.

Trump referred to the European Central Bank as an example for the Fed of Powell. The ECB has already reduced interest rates several times in recent months and announced a new interest rate reduction of a quarter of a percentage point on Thursday. The most important ECB interest rate, the depositor for banks, will be 2.25 percent, while the FED interest rates get stuck at a bandwidth between 4.25 and 4.5 percent.

The reason for the last interest rate reduction of the ECB: Donald Trumps Trade War. Due to the expected blow to the European economy, a lower interest rate is now needed, according to the ECB board. « The growth prospects have deteriorated as a result of ascending trade tensions, » said ECB chef Christine Lagarde in a press conference.

Effect on the economy

What both the FED and the ECB are struggling with, it is equally complex and difficult to predict effect on the economy of Trumps input taxes. On the one hand, those taxes increase inflation because they make products more expensive. At the same time, they can work inflation because they affect economic growth: they harm the trade and trust of citizens and companies. Less GDP growth works as a brake on the price increases.

The Fed is in the most difficult parquet. Trumps taxes, up to 145 percent on import from China, seem to have major negative effects on the US economy. Powell said on Wednesday that he expects higher inflation and lower economic growth due to Trumps taxes on balance. The US central bank strives for a double goal: price stability (inflation of 2 percent) and maximum employment.

The problem for the FED is that inflation fighting benefits from higher interest rates, but economic growth – and therefore employment – precisely with lower interest rates. For the time being, Powell, to Trump’s anger, seems to want to keep the interest right.

In the meantime, with his attack on Powell, Trump continues the position of the FED. As a fan of Lage Rentes, Trump has often under fire Powell, also in his first term as president (2017-2021). But his youngest attack is particularly fierce in tone. By implicitly threatening with Powell’s resignation, the president plays with fire in a time of nervousness in the financial markets. Investors see the independence of central banks as essential for financial stability.

Inflation puzzle

The ECB is less under tension, but is saddled by Trump with an inflation puzzle. Inflation in the eurozone (2.2 percent in March) is close to the ECB goal of 2 percent but can come out too low or too high due to the Trump shock.

The ECB estimates that Trumps are at least inflationing for the eurozone in the short term. ECB chef Lagarde spoke of a « negative shock » that affects exports and investments, and thus economic growth. According to the ECB, other inflation -protection factors are the decreased oil price and the expected influx of cheap Chinese goods, which no longer go to the US due to Trumps extremely high levies against China.

Lagarde at the same time spoke of ‘exceptional uncertainty’ – also about the development of inflation. Inflation -increasing in the somewhat longer term is, among other things, the recently announced German package of investments in infrastructure and defense (partly also in response to Trumps policy). « The net effect on inflation will become clear over time. » She wanted to, she said « don’t record on a certain interest path. »

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