Jerome Powell and President Donald Trump during the nomination announcement in the White House Rose Garden on Thursday, November 2, 2017 in Washington, DC, USA.
Andrew Haller Bloomberg | Getty Images
Depending on how the economic situation develops, President-elect Donald Trump and Federal Reserve Chairman Jerome Powell could face a policy clash in 2025.
If the economy overheats and inflation picks up again, Mr. Powell and others could decide to put the brakes on efforts to lower interest rates. This could infuriate Mr. Trump. President Trump has slammed Fed officials, including Powell, for not loosening monetary policy quickly enough during his first term in office.
Asked about the possibility of conflict, Joseph LaVogna, who served as chief economist at the National Economic Council during Trump’s first term, said there was “no question.” “When they don’t know what to do, they often do nothing. That may be a problem. If the president feels that interest rates should be lowered, will the Fed step in just for the public eye? ”
Mr. Powell became Fed chair in 2018, but the two sides have frequently clashed over the direction of interest rates after Mr. Trump nominated him for the post.
Mr. Trump aggressively criticized the chairman in public, and the chairman responded by saying how important it is for the Fed to be independent and away from political pressure, even from the president. He insisted.
When President Trump takes office in January, the two sides will operate from different backgrounds. There was little inflation in the first period, and even when the Fed raised rates, the benchmark interest rate remained well below current levels.
President Trump is planning an expansionary and protectionist fiscal policy that includes even tougher tariffs, tax cuts, and massive spending than during the last election. If the results start showing up in the data, the Powell Fed may be tempted to tighten monetary policy against inflation.
LaVogna, chief economist at SMBC Nikko Securities, who has been rumored to take the post in the new administration, thinks that’s a mistake.
“They’re going to look at the very untraditional policy approach that President Trump is putting forward, but they’re going to look at it through a very traditional economic lens,” he said. “The Fed is going to have to make some very difficult choices based on the traditional approach of what to do.”
Market expects fewer interest rate cuts
Futures traders have been confused in recent days about their expectations of what the Fed will do next.
According to CME Group’s FedWatch index, the market is pricing in the possibility of another rate cut in December, which seemed almost certain a week ago, at about the flip of a coin. Pricing further forward indicates a reduction of three-quarters of a percentage point through the end of 2025, which is also significantly lower than previously expected.
In recent days, investors have been nervous about the Fed’s intentions. Federal Reserve Director Michelle Bowman said Wednesday that inflation has been “stagnating” and signaled she may continue to seek a slower pace of rate cuts.
“All avenues lead to tension between the White House and the Fed,” said Joseph Brusuelas, chief economist at RSM. “It’s not just the White House. The Treasury Department, the Commerce Department and the Fed are all going to intersect.”
Indeed, while President Trump has been building a team of supporters to implement his economic policies, much of his success has been with accommodative, or at least Depends on precise monetary policy. For the Fed, that manifests itself in its quest to find a “neutral” interest rate, but it could mean something different for the new administration.
Bruellers said the fight over interest rates would create “political and policy tensions between the Federal Reserve and the White House, which clearly favor low interest rates.”
“If you’re going to impose tariffs and mass deportations, you’re going to limit aggregate supply while at the same time implementing deficit-financed tax cuts that encourage aggregate demand to increase. “There is a contradiction,” he added. “There is an inevitable crossroads where tensions will arise between Mr. Trump and Mr. Powell.”
avoidance of conflict
Certainly, there are several factors that can reduce tension.
One is that Powell’s term as Fed chair expires in early 2026, so President Trump may choose to hold out until he can appoint someone closer to his preferences. It’s also highly unlikely that the Fed will actually raise rates, barring some highly unexpected event that causes inflation to rise significantly.
Also, because President Trump’s policies will take some time to filter through the system, the impact on inflation and macroeconomic growth likely won’t be immediately apparent in the data, and no Fed action will be needed. Either way, the impact may not be that great.
“We expect higher inflation and slower growth,” said Mark Zandi, chief economist at Moody’s Analytics. “I think tariffs and deportations are a negative supply shock. They hurt growth and push up inflation.” “The Fed will probably cut rates again next year, but probably not as quickly as they otherwise would.”
So, assuming Mr. Trump does not reappoint Mr. Powell, the battle with Mr. Trump could become even more of a headache for the next Fed chairman.
“So I don’t think it will be a problem in 2025,” Zandi said. “It could become an issue in 2026, because at that point the rate cuts may be over and the Fed may be in a position where it definitely needs to start raising rates. That’s when it will become an issue.”
