Depending on how the economy develops, President-elect Donald Trump and Federal Reserve Chair Jerome Powell may be headed for a policy clash in 2025.
Powell and his colleagues may opt to halt their efforts to decrease interest rates if the economy struggles and inflation spikes up again. Trump, who criticized Powell and other Fed officials during his first time in office for not easing monetary policy swiftly enough, may become enraged by this.
When asked about the possibility of a conflict, Joseph LaVorgna, who was the head economist at the National Economic Council during Trump’s first term, responded without hesitation. They frequently do nothing when they are unsure of what to do. That might be an issue. Does the Fed dig its foot in if the president believes that rates should be decreased for the sake of public relations?
Even though Powell was appointed by Trump to be Fed head in 2018, the two frequently disagreed on interest rate policy.
Trump publicly and violently chastised the chair, who retorted that the Fed must remain independent and separate from political influences, even if those pressures originate from the president.
The two will be working in distinct environments when Trump assumes office in January. Even Fed rate hikes maintained benchmark rates substantially below their current level since there was little inflation throughout the first term.
More so than in his last term, Trump is preparing both expansionary and protectionist economic policies, which will involve significant spending, reduced taxes, and an even more stringent set of tariffs. The Powell Fed might be persuaded to maintain a more stringent monetary policy against inflation if the outcomes begin to appear in the data.
That would be a mistake, according to LaVorgna, chief economist at SMBC Nikko Securities, who is thought to be running for office in the incoming administration.
“They will examine a very unconventional policy approach that Trump is proposing, but they will do so through a very traditional economic lens,” he said. The Fed will have to make a very tough decision based on their conventional method of action.
Market sees fewer rate cuts
In recent days, futures traders have been unsure about what they expect the Fed to do next.
After being almost guaranteed a week ago, the market is pricing in a coin-flip possibility of another interest rate decrease in December, according to the CME Group’s sFedWatchgauge. Through the end of 2025, pricing further out shows the equivalent of three quarter percentage point reductions, which has also drastically decreased from earlier projections.
Regarding the Fed’s plans, investors’ nerves have been jangled in recent days. Indicating that she may keep pushing for a slower rate lowering schedule, Fed Governor Michelle Bowman said on Wednesday that inflation momentum had paused.
According to Joseph Brusuelas, chief economist at RSM, conflicts between the Fed and the White House are inevitable. The White House won’t be the only place. It will involve the intersection of Treasury, Commerce, and the Fed.
In order to carry out his economic program, Trump is undoubtedly assembling a group of supporters, but a large portion of the success hinges on accommodating or at the very least accurate monetary policy that doesn’t put undue pressure on growth. That could imply something different for the new government, but for the Fed, it is embodied in the pursuit of the neutral rate of interest.
The White House, which would obviously favor lower rates, and the Federal Reserve would clash politically and policyly over the debate over appropriate interest rates, according to Brusuelas.
Restricting aggregate supply and enacting deficit finance tax cuts at the same time will promote an increase in aggregate demand if tariffs or mass deportations are implemented. “Your policy matrix has a fundamental inconsistency,” he continued. Tensions between Powell and Trump arise from an unavoidable juncture.
Avoiding conflict
Indeed, there are a few things that could help to ease the tensions.
One is that Powell’s tenure as Fed chair ends in early 2026, thus Trump might decide to stay in the position until he can appoint a more suitable successor. Additionally, there is little likelihood that the Fed would raise rates unless there was a really unforeseen circumstance that caused inflation to spike significantly.
Additionally, it will take time for Trump’s policies to take effect, so any effects on GDP growth and inflation are unlikely to be immediately visible in the data, negating the need for a Fed response. Additionally, there’s a potential that the effects won’t be that great either way.
I anticipate slower growth and more inflation. Deportations and tariffs are, in my opinion, detrimental supply shocks. According to Moody’s Analytics chief economist Mark Zandi, they boost prices and harm growth. Even if it might not do so as rapidly as it would have otherwise, the Fed will nevertheless lower interest rates next year.
Therefore, if Trump doesn’t re-appoint Powell, conflicts with him might be more of a headache for the future Fed chair.
Therefore, Zandi stated, “I don’t think it’s going to be an issue in 2025.” In 2026, when the rate-cutting phase ends and the Fed might be in a situation where it must start hiking interest rates, that might become a problem. That’s when it becomes a problem.
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