Key Takeaways
- The Federal Reserve, the American counterpart to the European Central Bank, has maintained interest rates at their current level.
- The Fed has been reluctant in cutting rates, as President Donald Trump imposes trade tariffs on global partners that could reignite inflation.
- European central bankers have been more concerned that the trade tensions with the U.S. could slow their countries' economies.
In 2025 the European Central Bank and their American counterparts have taken a radically different approach to monetary policies.
The ECB continued to slash rates, while Fed kept them stable. The diverging paths were brought into sharper focus on Thursday after the ECB lowered their benchmark rate by a tenth of a point, its seventh decrease since June.
Jerome Powell, Federal Reserve chair, made public comments on the same day suggesting that U.S. Central Bankers are not in any hurry to cut the fed funds rate. The Fed has held its rate steady since December and cut it by 1 percentage from its peak of last year. The ECB, on the other hand, has lowered theirs by 1.75 percent.
Powell’s comments elicited an immediate response from President Donald Trump. Trump accused Powell of acting slowly to reduce rates, and falling behind Europe on lowering borrowing costs, while also boosting the economy.
Economists, however, said that the main cause of the difference was Trump’s policies, particularly his unpredictability and sprawling campaign of tariffs against trading partners. In the years preceding the tariffs the two central bankers largely moved together, reacting to similar currents in the economy.
Forecasters, investors and other experts expect that the tariffs will increase the cost-of-living. Fed officials, however are reluctant to cut rates out of fear of reigniting the inflation. European officials are concerned about a slowdown in the economy, particularly since the tariffs might hurt exports into the U.S.
“Every central banks is dealing with the complications caused by the trade war. A six-sigma event,” written Douglas Porter, BMO Capital Markets’ chief economist, wrote a note on Thursday. “The response to tariff uncertainty varies depending upon how sensitive the U.S. economy is, and the respective starting point for growth and inflation.”
Ernie Tedeschi of the Yale Budget Lab, director of economics, highlighted the specific differences between U.S. and European counterparts in a social media post on platform X. Tedeschi was referring President Trump’s apparent revival of 19th-century mercantilist-style economic policies.
“Europe did not raise their tariffs up to Gilded Age level, so they are not facing the same price pressure as the Fed,” he said.
