Fed Faces Pressure from Trump on Interest Rates in First Meeting of 2025

The Federal Reserve (Fed) will convene this week for its inaugural meeting of 2025 amidst heightened scrutiny from newly elected US President Donald Trump, who has publicly challenged the central bank's policies.

Trump's Demand for Lower Rates

In his recent address at the World Economic Forum, Trump signaled a potential conflict with the Fed, stating that he would "demand" lower interest rates. He reiterated his stance in a subsequent interview, emphasizing his desire for a substantial reduction and his belief that the Fed would comply.

Fed's Hesitation

In contrast to Trump's demands, Fed officials have hinted at a reluctance to adjust rates further, following a full percentage point cut in 2024. They have repeatedly expressed concerns about persistent inflation, which they see as a reason for proceeding cautiously in 2025.

Rate Hikes a Possibility

Some economists and market participants now speculate that the Fed may even be compelled to raise rates this year, which would likely draw backlash from Trump. Harvard economist Ken Rogoff suggests that the possibility of a hike is equivalent to that of a cut, citing potential factors such as rising deficits and investments in artificial intelligence.

Trump's Policies and Inflation

Fed officials have voiced concerns that Trump's trade and immigration policies could contribute to inflationary pressures. This has prompted them to lower their forecasts for additional rate cuts in 2025 from four to two.

Fed's 'Last Step' in Rate Adjustments

Despite some expectations for further rate decreases, Fed policymakers have indicated a preference for a gradual approach in 2025. Michelle Bowman and Jeff Schmid have suggested that previous rate cuts may have been the final step in the Fed's policy recalibration.

Trump vs. Powell

Trump's recent comments suggest that he may not tolerate a delay in rate reductions, potentially setting the stage for a collision course with Fed Chair Jerome Powell. Trump's previous criticisms of Powell and his belief that the president should have a say in Fed decisions add to the tension.

Independence of the Fed

Powell has maintained that he is not subject to removal before the end of his term in 2026. Nouriel Roubini warns that undermining the Fed's independence could exacerbate inflation due to rising expectations and bond market reactions.

Implications for Markets

A clash between Trump and the Fed could have significant implications for the stock market and economic growth. Roubini notes that even maintaining stable rates could trigger conflict with the Trump administration, as it seeks loose monetary policies to stimulate the economy.