The Federal Reserve is all but certain to raise the U.S. benchmark interest rate Wednesday from 1.75 to 2 percent, a move that will make credit card, mortgage and business loans a bit more expensive. But what the Fed does after this week depends largely on the economy — and President Trump’s trade fight.
The traditional economic playbook says Fed Chairman Jerome H. Powell should be increasing interest rates several more times this year and next to get rates back above 3 percent, a more normal level given that the U.S. economy looks very healthy by most measures.
There are a record number of job openings, unemployment is the lowest since 2000, growth is picking up, and even inflation finally appears to be rising to the Fed’s preferred level. Under normal circumstances, the traditional playbook says that by raising rates Powell and his team could work to ward off a potential spike in inflation or another harmful bubble.
But these are not normal circumstances: Trump is promising to turn U.S. trade policy on its head, putting hefty tariffs on some of the nation’s biggest trading partners and closest allies. He has vowed to enact more tariffs — even once threatening to choke trade off entirely — unless they make major concessions.
World leaders and business executives are still trying to figure out how to react to Trump’s trade agenda — and still wondering whether he’s really willing to start a full-blown trade war, which nearly all economists predict would hurt overall economic growth.
Powell and his Fed colleagues have a difficult decision to make: If they think the economy will stay on sure footing...