Trump grumbles the Fed is losing a race with Europe to cut interest rates. Is he right?

This week’s Federal Reserve meeting isn’t expected to pack much drama.

With uncertainty about the impact of President Donald Trump’s tariffs on inflation and the economy still elevated, the Fed is expected to leave its key interest rate unchanged for a fourth straight meeting. It may, though, pare back its forecast to just one rate cut this year from two because of inflation concerns, says economist Michael Feroli of JPMorgan Chase.

It’s also a pretty good bet the fireworks will arrive after the Fed announces its decision, assuming President Donald Trump lambastes it and Fed Chair Jerome Powell as he has done repeatedly in recent weeks.

Trump has called on the Fed to sharply lower rates – a strategy that typically juices the economy and stock market – citing the European Central Bank’s aggressive rate-cutting campaign over the past year.

“‘Too Late’ Powell must now LOWER THE RATE,’” Trump wrote in a social media post on June 5 after a disappointing estimate of May’s private-sector job growth by payroll processor ADP. “He is unbelievable!!! Europe has lowered NINE TIMES!”

The European Central Bank, or ECB, actually had reduced its benchmark rate seven times at the time of Trump’s post but cut it again the following day.

Does Trump have a point? Does the Fed’s persistent wait-and-see approach put the U.S. at an economic disadvantage compared to the Eurozone?

Simply put, Is the Fed losing a global race with the ECB to slash interest rates?

In a way. But not really.

The Fed slashed its key rate by a percentage point late last year after a pandemic-related inflation spike eased but has paused since as it waits to see the impact of Trump’s sweeping tariffs on inflation and the economy.

The central bank reduces rates to bolster a sluggish economy and hikes rates or keeps them high longer to head off inflation. But Trump’s tariffs pose an unusual dilemma for Fed officials because they’re expected to both raise consumer prices and hamper growth by sapping household buying power.

The ECB, meanwhile, has steadily lowered its benchmark rate by a total two percentage points over the past year as eurozone inflation has eased while its economy remains anemic.

That leaves its key rate at 2%, more than 2 percentage points below the Fed’s 4.25% to 4.5% and among the largest gaps between the regions in recent memory.

While Trump didn’t elaborate last week on why he’s distressed about a big divide in rates between the U.S. and the Eurozone, he has been more specific in the past.

In August 2019, after the Fed approved the first of three quarter-point cuts, Trump called for “at least” a 1-point cut, noting Germany’s key short-term rate was negative.

“We are competing with many countries that have a far lower interest rate, and we should be lower than them,” Trump tweeted at the time. He later added,” Strongest Dollar in history, very tough on exports.”

Traditionally, high interest rates strengthen the dollar by attracting investments to U.S. bonds and other fixed-income assets. Yet that makes U.S. exports more expensive for overseas buyers who must pony up more euros, for example, to afford the U.S. goods, hurting American manufacturers.

Conversely, lower rates generally weaken the dollar and boost U.S. makers by making their exports cheaper for customers in foreign countries.

Lower rates, of course, also lift an economy generally by shaving consumer and business borrowing costs and stocks.

“It does have.a much more stimulative effect,” John Canavan, lead financial analyst at Oxford Economics, said of rate cuts, including by making U.S. exports more appealing overseas.

More market-friendly interest rate policy also may mean a more appealing investment climate.

“Investors are diversifying away from the U.S., and the ECB’s move (on June 5) will only likely intensify that,” said Nigel Green, CEO of deVere Group, a financial advisory firm.

But there are a few big caveats.

Despite the Fed’s relatively high interest rates, the dollar has weakened against the euro and other currencies this year. That’s because investors have fled U.S. assets amid the uncertainty spawned by Trump’s on-again, off-again tariffs and Congressional Budget Office estimates that Trump’s budget plan would add $2.4 trillion to deficits over a decade.

“Even though the ECB has continued to lower rates, we still see weakening in the dollar,” Canavan said.

In other words, if Trump seeks a softer dollar to bolster exports, he’s already achieving that goal with his economic policies.

Fed rate cuts could diminish the greenback further, said Jonathan Millar, senior U.S. economist at Barclays.

But, he added, “It’s not so clear-cut that if the Fed started cutting (rates) that it would weaken the dollar. The dollar is already weak.”

“There are so many other things going on,” he added. “Trade policy is what’s most important for the dollar. People are just very worried about risks.”

While a feeble dollar bolsters exports, it has the opposite effect on imports, making foreign goods more expensive for American retailers and manufacturers.

“For U.S. importers, it’s a disadvantage,” said Andy Schneider, senior economist at BNP Paribas. “They have to pay more.”

And since companies typically pass along their costs to consumers, that would mean still higher costs for Americans who already are expected to struggle with the added expense of tariffs, Schneider said.

Thus, if the Fed starts cutting rates, he said, it could compound the cost burden U.S. shoppers are likely to face in coming months.

Canavan disagreed, saying lower rates would boost the economy broadly, increasing wages and giving households the wherewithal to afford pricier foreign goods.

Aside from the impact on the dollar, Trump may be pointing to the eurozone as a benchmark for how the U.S. should be handling interest rate policy as inflation eases after the pandemic.

But the U.S. and eurozone are in very different places, economists said.

In May, overall inflation was 2.4% in the U.S., still above the Fed’s 2% target, and 1.9% in the eurozone, just below the ECB’s similar goal.

And the U.S. economy is stronger, meaning it needs less support from policymakers through rate cuts. From the fourth quarter of 2023 to the fourth quarter of 2024, the U.S. economy grew 2.5% vs. 1.2% for the eurozone.

Oxford Economics expects the eurozone to grow 0.6% this year, nearly half the 1% expansion it forecasts for the U.S.

Bottom line: The ECB has the flexibility to trim rates because its inflation is lower and a more compelling reason to cut because its economy is shakier.

“U.S. inflation has been somewhat higher and U.S. economic growth is notably stronger,” Canavan said, noting the Fed is also being cautious about rate cuts because of Trump’s own tariffs.

While a rate cut now may spark the economy in the short term it could stoke higher inflation and hobble the economy more significantly over the longer term, Canavan said.

“It’s not really a race,” Canavan said of the disparate interest rates in the U.S. and eurozone.

Added Millar: “It doesn’t have to be about winners and losers.”

This article originally appeared on USA TODAY: Is Trump right that the Fed is losing race with Europe to lower rates?