The decision by the European Central Bank to cut interest rates by a quarter point was expected and appropriate given the fall in inflation and the economic uncertainty from the imposition of tariffs by the US – and the threat of more to come.
It came as the US president, Donald Trump, again launched an attack on Jerome Powell, the chair of the Federal Reserve Board, the US central bank. On one side of the Atlantic there was normality as an independent central bank got on with its business, while on the other that very independence seems to be under threat.
Over the years, politicians in developed countries have recognised the value of central bank independence. They may not always agree with the decisions taken – particularly when interest rates go up – but they appreciate a central bank that operates without political interference, that keeps inflation down and maintains stability, and that, crucially, takes the long view. Freed of political pressure, central banks can do the unpopular thing when needed.
This has been the context of ECB monetary policy in recent years, increasing interest rates in the face of sharply rising inflation and then moving them down again as price pressures eased. There is no perfect recipe for this, but – while slow off the mark as inflation started to rise in late 2021 – the ECB has generally acted predictably and logically. Now that inflation is close to its two per cent target and the growth outlook is weak, more reductions in interest rates may be on the way.
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In the US, things look different. Economic growth is weakening but the outlook for inflation has been changed by the imposition of sweeping tariffs. The Federal Reserve Board (Fed) is sitting on its hands and leaving interest rates where they are.
Donald Trump does not approve. He has said that the Fed should be cutting rates, just like the ECB. Pointedly, he added on Truth Social that “Powell’s termination cannot come fast enough!” It is not clear whether this referred to the end of the Fed chair’s term in May 2026, or whether Trump intends to try to oust him sooner. Powell has underlined the legal independence of the institution and said he has no intention of resigning.
This is more than just a spat within the Washington beltway. By targeting Powell, Trump threatens to undermine confidence in US financial markets; it is already shaky due to his hugely damaging tariffs policy.
As recently as last week, the US markets had a serious wobble, necessitating senior Fed figures to say it stood ready to intervene if necessary.
Regardless, Trump feels free to wade in again. The president is playing with fire, but does not seem to care. Do not be deceived by this week’s relative market calm. There is more to run in this story.
