The European Central Bank and the US Federal Reserve have announced their rate policies yesterday. The ECB decided to lower the three key ECB interest rates by 25 basis points, while the Fed chose to keep it as it is despite pressures from US President Donald Trump to lower rates.
Donald Trump inevitably became the notorious figure of yesterday’s central bank decisions: from the ECB due to his absence and from the Fed due to his interference attempts.
ECB: “Conspicuous by his absence was any mention of Donald Trump”
As to the ECB, the decision to lower the deposit facility rate – the rate through which the Governing Council steers the monetary policy stance – is based on its updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission.
“The disinflation process is well on track. Inflation has continued to develop broadly in line with the staff projections and is set to return to the Governing Council’s 2% medium-term target in the course of this year. Most measures of underlying inflation suggest that inflation will settle at around the target on a sustained basis. Domestic inflation remains high, mostly because wages and prices in certain sectors are still adjusting to the past inflation surge with a substantial delay. But wage growth is moderating as expected, and profits are partially buffering the impact on inflation,” said the ECB in its announcement.
“The Governing Council’s recent interest rate cuts are gradually making new borrowing less expensive for firms and households. At the same time, financing conditions continue to be tight, also because monetary policy remains restrictive and past interest rate hikes are still transmitting to the stock of credit, with some maturing loans being rolled over at higher rates. The economy is still facing headwinds but rising real incomes and the gradually fading effects of restrictive monetary policy should support a pick-up in demand over time,” the central bank continued.
“The Governing Council is determined to ensure that inflation stabilises sustainably at its 2% medium-term target. It will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. In particular, the Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission. The Governing Council is not pre-committing to a particular rate path.”
The interest rates on the deposit facility, the main refinancing operations and the marginal lending facility will be decreased to 2.75%, 2.90% and 3.15% respectively, with effect from 5 February 2025.
Kathleen Brooks, research director at XTB, commented: “Conspicuous by his absence was any mention of Donald Trump. There was little reference to the new US President and the potential for on European exports. She did say that greater friction in global trade would make the inflation outlook less certain for the euro area. However, like the Bank of Canada on Wednesday, the ECB will not get dragged into politics.
“Overall, this was an uneventful press conference. The rate cut was expected, and there are more rate cuts expected in the coming months. However, at some point the ECB will need to stop cutting rates, and the upside to the euro today, suggests that there is some expectation out there that we may be closed to the neutral rate for the Eurozone than Lagarde was willing to let on.”
Fed: Donald Trump lost this round
In the case of the Federal Reserve, the Powell-led central bank ignored President Donald Trump’s demands that it lower rates and decided to keep them as they are. Trump, who nominated Fed Chair Jerome Powell in his first term, accused Powell and his colleagues of failing “to stop the problem they created with Inflation.”
Trump has openly expressed frustration with the Fed’s stance, accusing Powell and his colleagues of failing to act against what he called a self-inflicted economic slowdown. “The Fed needs to cut rates now. They caused inflation, and now they’re hurting the economy by keeping rates too high,” Trump wrote on Truth Social. “We need action immediately.”
Powell, who was appointed by Trump in 2018, dismissed any suggestion that the central bank operates under political influence. “The Federal Reserve is an independent institution,” Powell said during a press conference following the rate decision. “We do not make decisions based on political considerations. We follow the data, and our mandate remains unchanged: stable prices and maximum employment.”
Trump has previously suggested he might attempt to remove Powell if he refuses to follow White House directives, but legal and historical precedent suggest such a move would be difficult, if not impossible. The Federal Reserve Act states that a president can only fire a Fed chair “for cause,” a term that has generally been interpreted to mean serious misconduct rather than policy disagreements.
In past legal battles over similar cases, courts have consistently ruled in favor of preserving the independence of regulatory agencies. Legal scholars argue that removing Powell without clear evidence of wrongdoing would likely lead to immediate legal challenges, potentially setting up a constitutional showdown between the White House and the central bank.
“If Trump were to attempt to fire Powell, the move would almost certainly be contested in court,” said Ellen Meade, a Duke University economics professor and former Fed official. “There’s no precedent for a president removing a Fed chair purely over policy disagreements, and such an attempt could destabilize financial markets.”
The Fed’s decision to hold rates steady signals its commitment to a data-driven approach rather than political influence. However, the standoff between Trump and the central bank introduces new uncertainties for investors, particularly as Trump has suggested he may push for legislation to alter the Fed’s independence.
