Jerome Powell and President Donald Trump announce the nomination in the Rose Garden of the White House on Thursday, November 2, 2017 in Washington, DC, United States.
Andrew Haller | Bloomberg | Getty Images
President-elect Donald Trump and Federal Reserve Chairman Jerome Powell could face a policy conflict in 2025, depending on how economic conditions develop.
If the economy overheats and inflation spikes again, Powell and his colleagues may decide to halt efforts to lower interest rates. That in turn could anger Trump, who spent his first term blasting Fed officials, including Powell, for not easing monetary policy quickly enough.
“There’s no doubt about it,” Joseph Lavonia, former chief economist at the National Economic Council during Trump’s first term, said when asked about the possibility of conflict. “When they don’t know what to do, they often do nothing. That could be a problem. If the president feels that interest rates should be lowered, will the Fed act in the public eye?”
Although Powell became Fed chairman in 2018, the two often clashed over the direction of interest rates after Trump nominated him to the position.
Trump publicly and harshly rebuked the Fed chairman, who responded by stressing the importance of the Fed being independent and free from political pressure, even if that pressure comes from the president.
The two men will operate in a different context when Trump takes office in January. During the first term, there was almost no inflation, which meant that even Fed to raise interest rates Keep the benchmark interest rate well below where it is now.
Trump is planning an expansionary and protectionist fiscal policy even more than during his previous campaign, which would include a round of tougher tariffs, lower taxes and huge spending. If the results start to show up in the data, Fed Chairman Powell may be inclined to adopt a more hawkish monetary policy on inflation.
Lavogna, chief economist at SMBC Nikko Securities who is rumored to serve in the new government, believes this is wrong.
“They’re going to look at the very unconventional policy approach proposed by Trump, but from a very traditional economic perspective,” he said. “The Fed is going to face a very difficult choice based on its traditional way of doing things.”
Market interest rate cuts are smaller
Futures traders have been hesitant in recent days over expectations for the Fed’s next move.
Markets are pricing in the possibility of another rate cut in December, which was all but certain a week ago, according to CME Group. Fed Watch. Further pricing shows the equivalent of a quarter of a percentage point drop by the end of 2025, which is also significantly lower than previously expected.
Investors have been nervous about the Fed’s intentions in recent days. Federal Reserve Governor Michelle Bowman noted on Wednesday that progress on inflation has “stalled,” suggesting she may continue to push for a slower pace of rate cuts.
“All roads lead to tensions between the White House and the Fed,” said Joseph Brusuelas, chief economist at RSM. “It’s not just the White House. It’s going to be the intersection of Treasury, Commerce and the Fed.”
Indeed, Trump is assembling a team of loyalists to implement his economic agenda, but success will depend largely on loose, or at least accurate, monetary policy that doesn’t push or constrain the economy too hard. Growth. For the Fed, this manifests as a search for “neutral” interest rates, but for the new administration, it could mean something different.
Brusulas said the debate over interest rate levels will create “political and policy tensions between the Fed and the White House, with the White House clearly favoring lower interest rates.”
“If you’re going to impose tariffs or mass deportations, then you’re talking about limiting aggregate supply while simultaneously implementing deficit fiscal tax cuts, which encourages an increase in aggregate demand. There’s a fundamental inconsistency in your policy matrix,” he added. “The inevitable crossroads will lead to tensions between Trump and Powell.”
avoid conflict
To be sure, there are factors that can ease tensions.
One is that Powell’s terminology is Fed Chairman The bill is set to expire in early 2026, so Trump may simply choose to ride it out until he can appoint someone more to his liking. Aside from some highly unexpected events that could push up inflation, the likelihood that the Fed will actually raise interest rates is slim.
Additionally, it will take some time for Trump’s policies to work their way through the system, so any impact on inflation and macroeconomic growth may not be evident in the data, so the Fed won’t need to respond. It’s also possible that the impact won’t be that big either way.
“I expect inflation to rise and growth to slow,” said Mark Zandi, chief economist at Moody’s Analytics. “I see tariffs and deportations as negative supply shocks. They hurt growth and push inflation higher.” The Fed will still cut interest rates next year, but they may not do so as quickly.”
So, assuming Trump doesn’t reappoint Powell, the fight with Trump could create an even bigger headache for the next Fed chairman.
“So I don’t think this will be an issue in 2025,” Zandi said. “That could become an issue in 2026 because by then, the rate cuts are over and the Fed may actually need to start raising rates. That’s when it will become an issue.”
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