The Fed's Looming Clash with Trump: Interest Rates, Inflation, and a Potential Rate Hike
As the Federal Reserve prepares for its first meeting of 2025, it faces the impending presence of a newly inaugurated President Donald Trump, who has already posed challenges to the central bank.
Trump's Demand for Lower Interest Rates
Trump has hinted at a confrontation with Fed policymakers, suggesting he would "demand" reduced interest rates. This stance contradicts recent signals from Fed officials, who have indicated that rates are unlikely to change significantly after a full percentage point decrease in late 2024.
Inflation Concerns and Potential Rate Hike
Federal Reserve officials have expressed growing concerns about persistent inflation, citing it as a reason for proceeding cautiously in 2025. Additionally, some officials have privately raised concerns that Trump's trade and immigration policies may contribute to further upward price pressure.
Amidst these concerns, some analysts are now suggesting the possibility of a rate hike this year, a move that would likely provoke Trump's opposition. Economist Ken Rogoff predicts that the odds of a hike are equal to those of a cut, citing potential deficits and AI-driven economic growth.
BNY CEO Robin Vince's Perspective
Robin Vince, CEO of BNY, believes rate hikes are possible but more likely sees the Fed maintaining rates steady for the near future. However, if the Trump administration imposes new tariffs on China and the European Union, more extreme possibilities could arise.
Cautious Approach and 'Last Step'
Fed policymakers have indicated a preference for a gradual approach in 2025, seeking to assess the impact of Trump's policies before making further rate adjustments. Some continue to anticipate a gradual decline in rates, while others believe the most recent cut in December may have been the "last step."
Trump's Impatience and Potential Collision
Trump's recent comments suggest he is running out of patience for further rate reductions, potentially setting up a collision course with Fed Chair Jerome Powell in the coming months. The president has previously criticized Powell and suggested he should have a say in Fed decisions.
Independence of the Fed and Inflation
Economist Nouriel Roubini warns that the Fed losing its independence through political interference could exacerbate inflation by raising inflation expectations and increasing bond market interest rates. Even maintaining rates steady could lead to a clash with the administration, which desires low-interest rates to stimulate economic growth.