Jerome Powell and Donald Trump at the White House Rose Garden during the nomination announcement on November 2, 2017, in Washington, D.C.
Andrew Haller Bloomberg | Getty Images
As the economic landscape unfolds, President-elect Donald Trump and Federal Reserve Chair Jerome Powell may find themselves at odds regarding policy decisions in 2025.
Should the economy heat up and inflation rise again, Powell and his colleagues might opt to halt initiatives aimed at reducing interest rates, a move that could upset Trump. Throughout his presidency, Trump has criticized Fed officials, including Powell, for not adopting a more accommodating monetary policy swiftly enough during his first term.
When asked about potential conflicts, Joseph LaVogna, who previously served as chief economist at the National Economic Council during Trump’s first term, expressed certainty that tensions were likely. “When faced with uncertainty, often a lack of action occurs, which could present issues. If the president advocates for lower interest rates, will the Fed feel pressured to respond for optics?”
Powell has been at the helm of the Fed since 2018, yet their relationship has often been contentious, particularly after Trump appointed him.
Trump has publicly berated the chairman, while Powell has maintained that the Fed’s independence from political influence, including from the president, is crucial.
With Trump’s upcoming administration in January, the backdrop will differ markedly. During the previous term, inflation was minimal, and even when the Fed increased rates, the benchmark interest rate remained considerably lower than it is now.
President Trump intends to implement expansionary and protectionist fiscal strategies characterized by stringent tariffs, tax reductions, and substantial spending compared to the last election. If the impacts of these policies become evident in the economic data, the Powell-led Fed might be compelled to adjust monetary policy more stringently in reaction to inflationary pressures.
LaVogna, now chief economist at SMBC Nikko Securities and rumored for a role in the new administration, sees potential pitfalls in this approach. “They’ll examine Trump’s unconventional policies from a traditional economic perspective,” he remarked. “The Fed will confront challenging decisions grounded in conventional wisdom.”
Market Anticipates Limited Interest Rate Reductions
In recent days, futures traders have exhibited uncertainty regarding the Fed’s next moves.
According to the CME Group’s FedWatch index, there’s now a 50/50 chance of a rate cut happening in December, a shift from a previously nearly certain outlook. Projections indicate a potential decrease of three-quarters of a percentage point by the end of 2025, which falls short of earlier expectations.
Investor sentiment has wavered about the Fed’s future course. Federal Reserve Governor Michelle Bowman stated last Wednesday that inflation appears to be “stagnating” and hinted at the likelihood of a continued slower approach to rate cuts.
“The potential for friction between the White House and the Fed is strong,” said Joseph Brusuelas, chief economist at RSM. “This tension isn’t confined to the White House; the Treasury Department, Commerce Department, and the Fed will all intersect.”
Indeed, while Trump has been assembling a team to support his economic agenda, much of his success relies on a responsive monetary policy from the Fed. This goal manifests as the Fed strives to pinpoint a “neutral” interest rate, which could take on various meanings under a new administration.
Brusuelas noted that the dispute over interest rates could spark “political and policy tensions” between a White House that clearly favors low rates and the Fed’s objectives.
“Implementing tariffs and mass deportations will restrict aggregate supply while at the same time rolling out deficit-financed tax cuts that stimulate aggregate demand. This creates a fundamental contradiction,” he elaborated. “Inevitably, tensions will emerge between Trump and Powell.”
Possibility of Avoiding Hostility
Nonetheless, several elements may help alleviate this tension.
First, Powell’s tenure as Fed chair ends in early 2026, which could prompt Trump to wait before appointing a successor aligned with his economic philosophy. Furthermore, without unforeseen circumstances triggering significant inflation, it’s improbable that the Fed will raise rates soon.
Additionally, since the effects of Trump’s policies will take time to materialize, immediate impacts on inflation and macroeconomic growth may not surface right away, possibly reducing the need for the Fed to act promptly. Regardless, the resulting impact may not be drastic.
“We project higher inflation coupled with slower growth,” indicated Mark Zandi, chief economist at Moody’s Analytics. “Tariffs and deportations are expected to generate a negative supply shock, adversely affecting growth while elevating inflation.” “The Fed is likely to trim rates again next year, albeit probably not as promptly as anticipated.”
Assuming Trump opts not to reappoint Powell, potential conflicts could intensify for the next chair of the Fed.
“Therefore, while I don’t foresee a significant issue in 2025, I think it could evolve into a concern in 2026, particularly if the Fed finds itself needing to raise rates as cuts may have already concluded,” Zandi suggested.
