Trump and Fed Chair Powell May Be on a Collision Course on Rates

President-elect Donald Trump and Federal Reserve Chairman Jerome Powell could be on a political collision course in 2025, depending on how economic circumstances evolve.

If the economy heats up and inflation picks up again, Powell and his colleagues may decide to curb their efforts to lower interest rates. That in turn could infuriate Trump, who lambasted Fed officials including Powell during his first term for failing to ease monetary policy quickly enough.

“Without a doubt,” said Joseph LaVorgna, former chief economist at the National Economic Council during Trump’s first term, when asked about the possibility of a conflict. “When they don’t know what to do, often they don’t do anything. That can be a problem. If the president believes rates should be lowered, the Fed, just for public policy reasons, goes along with it. ?”

Although Powell became Fed chairman in 2018, after Trump appointed him to the role, the two men have often clashed over the direction of interest rates.

Trump publicly and aggressively rebuked the president, who in turn responded by asserting how important it is that the Fed be independent and removed from political pressure, even if it comes from the president.

When Trump takes office in January, the two men will operate in a different context. During the first term, inflation has been low, meaning that even the Fed’s rate hikes have kept benchmark rates well below their current levels.

Trump plans a fiscal policy that is both expansionary and protectionist, even more so than during his previous campaign, which will include a series of even stricter tariffs, lower taxes and big spending. If the results start showing up in the data, Powell’s Fed may be tempted to maintain tighter monetary policy against inflation.

LaVorgna, chief economist at SMBC Nikko 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 non-traditional policy approach that Trump is proposing, but putting it into a very traditional economic perspective,” he said. “The Fed is going to have a really tough choice, based on its traditional approach to what it should do.”

Futures traders have been questioning their expectations for the Fed’s next actions in recent days.

The market is pricing in the possibility of a further cut in interest rates in December, whereas it was almost certain a week ago, according to FedWatch from the CME group. Longer-term prices indicate the equivalent of three-quarters of a point reduction through the end of 2025, which is also considerably lower than earlier expectations.

Investors’ nerves have been tested in recent days over the Fed’s intentions. Fed Governor Michelle Bowman noted Wednesday that progress on inflation has “stalled,” indicating she may continue to push for a slower pace of rate cuts .

“All roads lead to tension between the White House and the Fed,” said Joseph Brusuelas, chief economist at RSM. “It’s not just going to be the White House. It’s going to be Treasury, it’s going to be Commerce and the Fed crossing paths.”

Indeed, Trump is assembling a team of loyalists to implement his economic agenda, but much of the success depends on accommodative or at least precise monetary policy that does not push too hard to stimulate or constrain growth. For the Fed, this translates to the quest for a “neutral” interest rate, but for the new administration, it could mean something different.

The fight over where rates should be will create “political tensions between the Federal Reserve and the White House who would clearly prefer lower rates,” Brusuelas said.

“If one considers imposing tariffs, tariffs or mass expulsions, it is about restricting aggregate supply while simultaneously implementing tax cuts to finance the deficit, which which encourages an increase in aggregate demand. You have a fundamental inconsistency in your policy matrix. “There is an inevitable crossroads that leads to tension between Trump and Powell.”

Certainly, certain factors could ease tensions.

The first is that Powell’s term as Fed chair expires in early 2026, so Trump could simply choose to leave it until he can appoint someone as chair he likes more. There is also little chance that the Fed will decide to raise rates short of a very unexpected event that pushes inflation to a much higher level.

Furthermore, 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 immediately apparent in the data, thus not requiring a response from the Fed. It’s also possible that the impacts aren’t that great one way or another.

“I expect higher inflation and slower growth. I think the eviction tariffs are negative supply shocks. They hurt growth and increase inflation,” he said. said Mark Zandi, chief economist at Moody’s Analytics. “The Fed will cut interest rates again next year, but perhaps not as quickly as it otherwise might have done.”

Battles with Trump could therefore be more of a headache for the next Fed chair, provided Trump does not reappoint Powell.

“So I don’t think it’s going to be a problem in 2025,” Zandi said. “This could be a problem in 2026, because by then the rate cut will be over and the Fed could be in a position where it will definitely have to start raising interest rates. That’s when it will become a problem.”