The US Federal Reserve cut interest rates again Thursday – this time by 25 basis points – amid a moderating inflation rate and a softening labour market. But it’s the return of Donald Trump to the White House and concerns that he might seek significant influence over the central banks’ policy decisions that will be the main focus.
There are fears that Trump is likely to reignite his campaign to influence the Federal Reserve’s decisions moving forward. He frequently criticized the Fed, particularly under Jerome Powell’s chairmanship, for not lowering interest rates more aggressively. In 2018 and 2019, he repeatedly voiced dissatisfaction, claiming that higher rates were a drag on the US economy and put the country at a competitive disadvantage in international markets.
Can Jerome Powell stay on at the Fed?
Fed Chair Powell said he was ‘feeling good’ about the economy last week, although he did warn that the US was on an unsustainable path as far as fiscal policy is concerned. He also made it clear that he would complete his term as Chairman which runs until 2026. The President has no power to sack him.
“Forex markets are still predicting one more 25 basis point rate cut in 2024, but the probabilities are swinging about a bit,” said David Morrison, an FX markets analyst with Trade Nation. “As usual, the Fed will remain data-dependent when it comes to rate decisions, although Powell maintains that current monetary policy remains restrictive. No doubt he’s thinking of all those real estate loans that will reset next year.”
Trump even went as far as suggesting negative interest rates — a stance almost unheard of in the US. With inflation cooling but still elevated, Trump may argue that lower rates are necessary to fuel economic growth, particularly in the lead-up to the 2026 midterms.
The now President-Elect Trump appointed four of the seven current Fed Board governors during his previous term, including the controversial re-nomination of Jerome Powell. However, he also openly suggested firing Powell – a move he legally couldn’t enforce but used as leverage to influence Fed decisions. His strong preference for low-interest-rate advocates likely influenced his appointments, prioritizing growth and employment over strict inflation control.
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Can Powell survive under a Trump administration?
Should Powell remain at the Fed, Trump may again publicly challenge his decisions, possibly nominating governors who share his economic philosophy, with an eye on reducing Fed autonomy. He could also push for replacements more sympathetic to his economic policies if any positions open up.
During his first term, Trump was concerned with the strength of the dollar, often calling for a weaker dollar to boost US exports. Though he didn’t manage to directly influence dollar policy, he openly pressured the Fed to cut rates, which would generally have a devaluing effect on the currency.
With trade at the forefront of his agenda, “Trump might pursue a weaker dollar to maintain a competitive edge, potentially through tactics that pressure the Fed into actions benefiting US trade,’ comments Nigel Green, CEO of wealth manager deVere Group. “A lower dollar could boost American manufacturing and exports, while also helping to offset tariff impacts.”
Trump’s previous administration frequently engaged in discussions about limiting the Fed’s autonomy. Though he faced legal and political barriers, Trump’s vocal challenges to the Fed set a precedent for public criticism of an institution that traditionally operated independently from the executive branch.
His return to the White House could lead to further efforts to limit Fed independence or increase scrutiny, particularly if inflation resurges or if monetary policy tightens. He may call for reforms that align Fed decisions more closely with the White House’s economic agenda, positioning this as an alignment of the Fed with national interests.
Trump’s approach to the Fed will likely mix familiar pressures for lower rates and personnel shifts, with an added emphasis on trade and dollar competitiveness. Although the Fed’s legal independence remains a limiting factor, Trump’s history of public statements and actions suggests he could be relentless in trying to sway monetary policy.
