President Donald Trump has urged Federal Reserve Chair Jerome Powell to reduce interest rates in order to prevent an economic downturn. However, a researcher noted that it is uncertain how effective rate cuts might be in mitigating challenges in sectors like consumer goods and housing, which are particularly sensitive to tariffs. The potential dismissal of the central bank’s head by Trump could have significant negative repercussions.
The president has consistently advocated for lower interest rates, openly appealing to the central bank for reductions. On social media, Trump criticized Powell, dubbing him “Mr. Too Late” and a “major loser,” emphasizing the need for rate cuts to avoid an economic slowdown.
Neil Dutta, head of economic research at Renaissance Macro, highlighted the limitations of the Federal Reserve in addressing issues related to tariffs and trade conflicts. Dutta explained on CNBC that the Fed lacks the appropriate tools to counteract a trade war’s impact, particularly on consumer durable goods and housing, which are sectors adversely affected by tariffs. Consequently, the effectiveness of rate cuts in these areas remains uncertain.
Tariffs have the potential to drive inflation, though whether this results in a temporary price spike or a prolonged issue is yet to be determined. Tariffs can also cause an economic slowdown if consumer and business expenditures decrease due to increased costs. As such, the Federal Reserve is in a cautious stance; it cannot lower rates for fear of reigniting inflation, but rising unemployment may force its hand. According to Dutta, interest-rate cuts may not adequately shield consumer goods or housing from the repercussions of tariffs, and a slowdown seems imminent, if not already underway.
Dutta expressed concern about a looming recession, noting that the economy may already be in its midst. He anticipates further deceleration in housing, reduced investment spending, and moderated employment growth. To prevent a full-scale recession, a policy change is necessary, as restoring confidence becomes increasingly difficult once it is diminished.
Dutta likened the situation with the president to a dial rather than an on/off switch, suggesting that economic uncertainty may persist due to fluctuating policies. While a temporary reprieve in stock and bond market volatility occurred after Trump paused his latest tariff initiative, market instability remains, exacerbated by Trump’s ongoing criticism of Powell. Trump recently indicated impatience with Powell’s leadership, sparking discussions on the possibility of removing the Fed chair.
In Dutta’s view, the economy is already experiencing adverse conditions. If Powell is replaced with someone more politically compliant, it might backfire on Trump and could lead to higher long-term interest rates than would otherwise occur.
This report first appeared on Fortune.com.
