Jerome Powell and President Donald Trump during the nomination announcement in the Rose Garden of the White House on Thursday, Nov. 2, 2017, in Washington, DC, U.S.
Andrew Herrer | Bloomberg | Getty Images
President-elect Donald Trump and Federal Reserve Chairman Jerome Powell could be on a policy collision course in 2025, depending on how economic conditions play out.
If the economy heats up and inflation flares up again, Powell and his colleagues may decide to put the brakes on efforts to cut interest rates. That could infuriate Trump, who has lambasted Fed officials, including Powell, for not easing monetary policy quickly enough during his first term.
“Without question,” said Joseph LaVergna, former chief economist of the National Economic Council during Trump’s first term, when asked about the potential for conflict. “When they don’t know what to do, often they don’t do anything. That can be a problem. If the president thinks rates should be cut, does the Fed just dig in its feet for public optics?”
Although Powell became Fed chair in 2018, after Trump nominated him for the post, the two frequently clashed over the direction of interest rates.
Trump publicly and aggressively chastised the chair, who responded by saying how important it was for the Fed to remain independent and insulated from political pressure, even if he was president.
The two will serve behind each other when Trump takes office in January. During the first period, there was very little inflation, meaning that even Increase in feed rate Keep benchmark rates well below where they are now.
Trump is planning both an expansionary and protectionist fiscal policy, even more so than during his last run, which would include tariffs, lower taxes and bigger spending. If the results start to show in the data, Powell may be tempted to tighten monetary policy against inflation.
Lavergna, chief economist at SMBC Nico Securities, who is rumored for a position in the new administration, thinks that would be a mistake.
“They’re going to look at a very unorthodox approach to policy that Trump is bringing forward but present it through a very traditional economic lens,” he said. “The Fed will have a really tough choice based on its traditional approach to what to do.”
The market sees a lower rate of decline.
Futures traders have been weighing up their expectations for what the Fed will do next in recent days.
According to CME Group, the market is pricing in a near-coin flip chance of another interest rate cut in December, after it was almost certain a week ago. Feed Watch Further gauge pricing points to the equivalent of a three-quarter percentage point decline by the end of 2025, which is also significantly below earlier expectations.
Investors’ nerves have been jittery in recent days about the Fed’s intentions. Fed Governor Michelle Bowman noted on Wednesday that progress on inflation has “stagnant,” signaling that she may continue the slow pace of rate cuts.
“All roads lead to tension between the White House and the Fed,” said Joseph Brusillas, chief economist at RSM. “It’s not just going to be the White House. It’s going to be the Treasury, it’s going to be Commerce and the Fed all coming together.”
Indeed, Trump is building a team of loyalists to implement his economic agenda, but much of the success depends on accommodative or at least sound monetary policy that does not push too hard to boost or limit growth. For the Fed, this is represented as seeking a “neutral” interest rate, but for the new administration, it may mean something different.
Brusuelas said the struggle over where rates should be “will create political and policy tension between the Federal Reserve and the White House, which clearly prefers lower rates.”
“If there’s going to be a tariff, or mass deportations, you’re talking about restricting aggregate supply and at the same time implementing deficit financing tax cuts, which will increase aggregate demand. “You have a fundamental contradiction in your policy matrix,” he added. “There is an inevitable confluence that results in tensions between Trump and Powell.”
Avoiding conflicts
Certainly, there are some factors that can reduce stress.
One is that Powell’s term as Feed chair His term expires as early as 2026, so Trump could choose to kick him out until he puts someone he likes in the chair. It is also highly unlikely that the Fed will actually raise rates outside of a highly unlikely event that pushes inflation much higher.
In addition, Trump’s policies will take some time to work their way through the system, so any impact on inflation and macroeconomic growth will likely not be readily apparent in the data, thus the Fed’s response. will not be required. It is also possible that the effects are not that great.
“I expect inflation and slower growth,” said Mark Zindi, chief economist at Moody’s Analytics. ” “The Fed will still cut interest rates next year, perhaps not as quickly as it would otherwise.”
Battles with Trump, then, could be more of a headache for the next Fed chair, assuming Trump doesn’t reappoint Powell.
“So I don’t think it’s going to be an issue in 2025,” Zandi said. “That could be a problem in 2026, because at that point, rate cuts are over and the Fed could be in a position where it definitely needs to start raising interest rates. Then when it becomes a problem. will go.”
