Trump: High Inflation Makes Fed Rate Cuts Difficult

Analysis suggests that price instability due to rising energy costs is making it difficult for the U.S. central bank (Fed) to cut its benchmark interest rate. Economic historian Duncan Weldon diagnosed that as price pressures grow due to instability in the Middle East, the Fed faces a situation where it must focus more on price stability than on cutting interest rates. This could put pressure on the implementation of interest rate cut policies that former President Donald Trump anticipates. In an interview with WEEKLY BIZ, Duncan Weldon explained that the Fed has traditionally adhered to a policy of not directly intervening in price fluctuations caused by supply-side factors such as energy prices. This is because energy prices are difficult to control solely through interest rate policy, and raising rates could exacerbate the side effects of an economic downturn. However, the current situation presents a unique challenge that makes it difficult for the Fed to adhere to this principle.

Due to the extreme inflation experienced in 2022-2023, consumers' price sensitivity remains high, increasing the risk that a rise in oil prices could quickly spread as overall inflationary pressure. According to the Federal Reserve Bank of New York, the U.S. inflation expectation rate in March stood at 3.4%. This expectation rate can influence consumers' and businesses' decisions on price and wage increases, potentially fueling a vicious cycle of actual price hikes.

The Fed, where interest rate cuts were taken for granted after the new chairman took office, has encountered an unexpected turn of events. While early-year market forecasts predicted two interest rate cuts within the year, the emergence of escalating energy prices from the Middle East has made this prospect increasingly unlikely. Although it is true that the U.S. is less vulnerable as an energy importer than in the past due to increased shale energy production, rising gasoline prices still directly burden American consumers. Duncan Weldon assessed that it has become even harder for the Fed to hastily cut rates while ignoring this consumer pain. Weldon pointed out that current geopolitical risks and the resulting energy price volatility are placing significant constraints on the Fed's monetary policy operations. It is becoming more likely that the Fed will have to delay or scale back its interest rate cuts to achieve its price stability target.