Anamika Dey, editor
Brief news
- President-elect Trump and Fed Chair Powell may face tensions in 2025 over interest rate policies, especially if inflation rises and the economy overheats.
- Trump’s aggressive fiscal policies could conflict with Powell’s traditional monetary approach, leading to potential disagreements.
- Powell’s term ends in 2026, allowing Trump to appoint a more aligned Fed chair, potentially easing tensions in the short term.
Detailed news
Depending on the outcome of economic circumstances, President-elect Donald Trump and Federal Reserve Chair Jerome Powell may be on a collision course in 2025.
Powell and his companions may elect to slow down their efforts to reduce interest rates in the event that inflation resumes and the economy overheats. This could potentially anger Trump, who during his first term in office criticized Fed officials, including Powell, for failing to promptly relax monetary policy.
When queried about the possibility of a conflict, Joseph LaVorgna, the former chief economist at the National Economic Council during Trump’s first term, responded, “Absolutely.” “They frequently refrain from taking action when they are uncertain about their options.” That may pose an issue. If the president believes that rates should be reduced, does the Federal Reserve press its heels in solely for the sake of public perception?
Despite the fact that Powell was appointed Fed chair in 2018, following Trump’s nomination, the two frequently disagreed on the trajectory of interest rates.
Trump publicly and aggressively criticized the chair, who subsequently emphasized the significance of the Federal Reserve’s independence and independence from political pressures, regardless of whether they originate from the president.
Trump will assume office in January, and the two will be operating under a differentiated environment. Inflation was minimal during the initial tenure, which resulted in benchmark rates remaining significantly lower than they are currently, despite the Federal Reserve’s rate hikes.
Trump is implementing a fiscal policy that is both expansionary and protectionist, which is more aggressive than it was during his previous administration. This policy will involve increased spending, reduced taxes, and an even more stringent round of tariffs. The Powell Fed may be inclined to maintain a more stringent monetary policy in response to inflation if the results begin to manifest in the data.
LaVorgna, the chief economist at SMBC Nikko Securities, who is rumored to be a candidate for a position in the new administration, believes that this would be an error.
“They will examine the unconventional policy approach that Trump is proposing, but they will do so through the lens of traditional economics,” he stated. “The Federal Reserve will be faced with a challenging decision due to their conventional approach to policy.”
The market anticipates a decrease in the frequency of rate cutbacks.
In recent days, futures speculators have been uncertain about the Federal Reserve’s next course of action.
The market is currently pricing in a coin-flip possibility of an additional interest rate cut in December, a change from the near certainty it was a week ago, according to the FedWatch gauge of the CME Group. The equivalent of three quarter percentage point reductions through the end of 2025 is indicated by pricing further out, which is also substantially lower than previous expectations.
In recent days, investors have been experiencing anxiety regarding the Federal Reserve’s intentions. On Wednesday, Federal Reserve Governor Michelle Bowman observed that inflation has “stalled,” suggesting that she may persist in advocating for a more gradual rate of rate reductions.
Joe Brusuelas, the chief economist at RSM, stated, “All roads lead to tensions between the White House and the Fed.” “It will not be limited to the White House.” The Federal Reserve, Commerce, and Treasury will all intersect.
In fact, Trump is assembling a team of supporters to execute his economic agenda. However, the success of this effort is contingent upon a monetary policy that is either accommodative or, at the very least, precise, and does not exert excessive pressure to either stimulate or impede growth. In the context of the Federal Reserve, this is embodied in the pursuit of the “neutral” interest rate; however, the new administration may interpret it differently.
Brusuelas stated that the Federal Reserve and the White House will experience “political and policy tensions” as a result of the ongoing debate regarding the appropriate rate. The White House is explicit in its preference for lower rates.
“When tariffs or mass deportations are implemented, they restrict aggregate supply while simultaneously promoting an increase in aggregate demand through deficit finance tax cuts.” He further stated, “Your policy matrix is fundamentally inconsistent.” “Tensions between Powell and Trump are an inevitable consequence of the crossroads.”
Preventing conflict
Certainly, there are certain factors that could help alleviate the tensions.
The first is that Powell’s tenure as Fed chair concludes in early 2026. Consequently, Trump may elect to endure the situation until he can appoint an individual who is more compatible with his preferences. It is also unlikely that the Federal Reserve would raise rates unless there is an unforeseen event that would significantly increase inflation.
Additionally, the implementation of Trump’s policies will require a significant amount of time to penetrate the system. Consequently, any effects on inflation and macroeconomic growth will not be immediately evident in the data, thereby avoiding the necessity of a Fed response. Additionally, there is a possibility that the consequences may not be as significant as they appear.
“I anticipate a decrease in growth and an increase in inflation.” I believe that the tariffs and the deportations are negative supply disruptions. “They increase inflation and impede growth,” stated Mark Zandi, chief economist at Moody’s Analytics. “The Federal Reserve will continue to reduce interest rates next year; however, the pace may be less rapid than it would have been otherwise.”
If Trump does not re-appoint Powell, the next Fed chief may face an even greater challenge in dealing with disputes with the president.
“Consequently, I do not anticipate that it will be a concern in 2025,” Zandi stated. “It could be a concern in 2026, as the Fed may be in a position to begin raising interest rates, as the rate cutting has concluded. At that point, it becomes a problem.
Source : CNBC news
