The Federal Reserve on Wednesday is widely expected to hold interest rates steady for the fourth meeting in a row, while the European Central Bank just lowered its rates for the eighth time in a year.
The divide has caught the attention of President Trump, who has seized on the gap as he pushes the Fed to lower rates by a full percentage point. He did so again last week as he called central bank chairman Jerome Powell a “numbskull” who has refused to ease policy despite Europe dropping its rates “10 times.”
The two central banks in the US and Europe have diverged as their respective economies move in different directions, impacted not just by tariffs from the Trump administration but other domestic factors.
Jerome Powell, left, chair of the US Federal Reserve, speaks with Christine Lagarde, president of the European Central Bank in Canada on May 20. (Photo by COLE BURSTON//AFP via Getty Images) ·COLE BURSTON/ via Getty Images
Earlier this month the ECB cut its benchmark interest rate to 2% from 2.25%, the lowest level since early 2023, leaving borrowing costs now more than 2 percentage points lower in Europe than the US. It also signaled it is nearing the end of its rate-cutting cycle.
The Fed last cut rates in December 2024, reaching a target range of 4.25%-4.5%, and has yet to cut rates during Trump’s second term in office.
“The president is going to keep getting more and more upset about it,” said Wilmington Trust chief economist Luke Tilley.
Perhaps the major difference is how the two central banks are viewing inflation. Policymakers in the US hiked their inflation forecasts in the spring as they worried about the ultimate impact of Trump’s tariffs on prices — even though the higher expected prices haven’t arrived yet. The Fed will offer new forecasts this coming week.
In Europe, by contrast, the ECB has been cutting its inflation forecasts and now expects inflation to fall to its target of 2% this year before falling further to 1.6% next year.
“The European Union is cutting because inflation is low and there’s a threat to growth,” Tilley said. “I say the Fed either should be or will be cutting because inflation is low and there’s a threat to growth, but they’re holding on a little bit here.”
Jeffrey Roach, chief economist for LPL Financial, said the Fed is more likely to remain in “wait-and-see” mode than the ECB because US consumers are on stronger footing than their European counterparts, giving the Fed the luxury of time before US policymakers have to act.
“Relatively stronger consumer demand means US inflation is running a bit hotter than the Euro area,” said Roach. “As growth prospects look weaker in the Euro area, the ECB is becoming more dovish as they respond to economic pressures in Europe.”
ECB president Christine Lagarde has warned that trade tensions could lead to greater volatility and risk aversion in financial markets, which could weigh on demand in Europe and would also act to lower inflation.
Most exports to the US face a 10% tariff, and levies could rise to 50% if the European Union and the US don’t reach a deal by the White House’s July 9 deadline.
A fragmentation of global supply chains could also raise inflation by pushing up import prices and adding to capacity constraints in the domestic economy, Lagarde added.
Unlike the US, Europe’s central bank does not have a dual mandate. The ECB only targets inflation, while the Fed has to maintain both stable prices and maximum employment.
Fed Chair Jerome Powell and many of his colleagues this year have repeatedly urged caution and patience on rates, saying they expect Trump’s tariffs to push inflation higher and drag down growth, putting the Fed in a challenging spot.
President Trump speaks in the East Room of the White House, on June 12. (AP Photo/Alex Brandon) ·ASSOCIATED PRESS
But a divide is emerging within the Fed about whether to hold rates steady for some time or get more comfortable about cuts later this year as officials try to determine whether any inflation coming from Trump’s tariffs will prove to be longer-lasting.
Some policymakers are arguing for “looking through” the impact of the duties as temporary, a stance that would leave the door open for cuts. Many on the rate-setting committee, however, believe there is a risk that inflation from tariffs could become more persistent.
“If we had a good Fed chairman, you would lower rates,” Trump told reporters earlier this week. “And you know what? If inflation happened in a year from now or two years, let them raise rates.”
The president stressed that the US has a lot of debt coming due and lower rates would mean lower interest expense for the US.
“If this guy would lower rates, we get a lower interest rate. It’s unbelievable,” said Trump. “And he’s worried about inflation.”
The World Bank warned this week that heightened trade tensions and policy uncertainty are expected to drive global growth down to 2.3 percent this year, nearly half a percentage point lower than the rate that had been expected at the start of the year and the slowest pace since 2008 outside of outright global recessions.
The international body said turmoil has resulted in growth forecasts being cut in nearly 70% of all economies — across all regions and income groups. However, a global recession is not expected.
Dustin Reid, chief strategist for fixed income at Mackenzie Investments, which has $150 billion in assets under management, said he thinks “the ECB may need to go a bit lower” with its rates. “Tariffs are going to be quite challenging for the European Union,” said Reid.
On the Fed side, Reid thinks September is in play for a Fed rate cut.
“I do think the labor market data in the US is cracking a bit,” said Reid, adding that he “would not be surprised” if Powell this coming week keeps “a little bit of an open door [to] at least keep July in play.”
