Key facts
- President Donald Trump threatened to halt trade with countries with a trade deficit unless the Federal Reserve lowers interest rates.
- Trump cited the US Supreme Court's acknowledgment of his absolute right to halt trade.
- The US ran a $1.2 trillion trade deficit with all trading partners last year.
- A surprisingly strong August jobs report showed 162,000 new workers were hired.
- Rate hike odds for the upcoming Fed meeting increased to 60% after the jobs report.
- Annual inflation has risen to 3.4% in July, partly due to increased gas prices.
President Donald Trump threatened on Friday to prevent the US from trading with many nations unless the Federal Reserve lowers interest rates, a move he described as "better than tariffs."
Trump stated in a post on Truth Social that he has an "absolute right" to halt trade with countries with which the US runs a deficit, citing a Supreme Court decision. He urged the Fed Board to "get smart - BE PATRIOTS for a change."
A trade deficit occurs when a country imports more than it exports. Last year, the US ran its largest trade deficit with China, exceeding $200 billion, followed by Mexico and Vietnam. Overall, the US recorded a $1.2 trillion trade deficit with all trading partners.
The president's threat followed a surprisingly strong August jobs report, which showed US employers hired 162,000 new workers, more than double economists' expectations. This report increases the possibility that the Fed may raise interest rates to combat inflation concerns at its upcoming policy meeting.
Rate hike odds for the Federal Reserve's upcoming meeting jumped to 60% from 49% on Thursday, according to CME FedWatch, after the jobs report was released. Fed officials have offered mixed signals ahead of their two-day policy meeting beginning September 15.
Fed Governor Kevin Warsh indicated last week that he is open to raising rates if inflation remains too high, stating, "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do." Fed Governor Michael Barr also said he is prepared to vote for a rate hike soon if new inflation data does not show progress toward the bank's 2% target. Fed Governor Chris Waller noted he is willing to wait longer but would support a hike if inflation does not eventually slow.
The August Consumer Price Index report, due next Friday, is now a key focus. The nation's annual inflation rate rose to 3.4% in July since the war with Iran began in February, primarily driven by a significant increase in gas prices due to transit issues in the Strait of Hormuz. This has led to higher transport costs for businesses and expectations of forthcoming price hikes.
If Trump were to follow through on his threat to cut off trade, it could further increase prices and disrupt supply chains, potentially impacting businesses and consumers and weighing on the broader economy. Trump has previously called for lower interest rates this week.