Trump and Fed Chair Powell could be set on a collision course over interest rates

President-elect Donald Trump and Federal Put off Chair Jerome Powell could be on a policy collision course in 2025 depending on how economic circumstances play out.

Should the thrift run hot and inflation flare up again, Powell and his colleagues could decide to tap the brakes on their efforts to lower interest kinds. That in turn could infuriate Trump, who lashed Fed officials including Powell during his first term in employment for not relaxing monetary policy quickly enough.

“Without question,” said Joseph LaVorgna, former chief economist at the Native Economic Council during Trump’s first term, when asked about the potential for a conflict. “When they don’t be familiar with what to do, oftentimes they don’t do anything. That may be a problem. If the president feels like rates should be lowered, does the Fed, unprejudiced for public optics, dig its feet in?”

Though Powell became Fed chair in 2018, after Trump nominated him for the position, the two disharmonized often about the direction of interest rates.

Trump publicly and aggressively berated the chair, who in turn responded by asserting how worthy it is for the Fed to be independent and apart from political pressures, even if they’re coming from the president.

When Trump chronicle b debases office in January, the two will be operating against a different backdrop. During the first term, there was little inflation, connotation that even Fed rate hikes kept benchmark rates well below where they are now.

Trump is scheming both expansionary and protectionist fiscal policy, even more so than during his previous run, that will take in an even tougher round of tariffs, lower taxes and big spending. Should the results start to show up in the data, the Powell Fed may be leaded to hold tougher on monetary policy against inflation.

LaVorgna, chief economist at SMBC Nikko Securities, who is rumored for a fix in the new administration, thinks that would be mistake.

“They’re going to look at a very nontraditional approach to policy that Trump is luring forward but put it through a very traditional economic lens,” he said. “The Fed’s going to have a really difficult choice based on their customary approach of what to do.”

Futures traders have been waffling in late-model days on their expectations for what the Fed will do next.

The market is pricing in about a coin-flip chance of another attention rate cut in December, after it being a near certainty a week ago, according to the CME Group’s FedWatch gauge. Pricing aid out indicates the equivalent of three quarter percentage point reductions through the end of 2025, which also has come down significantly from preceding expectations.

Investors’ nerves have gotten jangled in recent days about the Fed’s intentions. Fed Governor Michelle Bowman on Wednesday respected that progress on inflation has “stalled,” an indication that she might continue to push for a slower pace of rate settles.

“All roads lead to tensions between the White House and the Fed,” said Joseph Brusuelas, chief economist at RSM. “It won’t just be the Chalky House. It will be Treasury, it’ll be Commerce and the Fed all intersecting.”

Indeed, Trump is building a team of loyalists to implement his economic agenda, but much of the sensation depends on accommodative or at least accurate monetary policy that doesn’t push too hard to either boost or qualify growth. For the Fed, that is represented in the quest to find the “neutral” rate of interest, but for the new administration, it could mean something discrete.

The struggle over where rates should be will create “political and policy tensions between the Federal Contract for store and the White House that would clearly prefer lower rates,” Brusuelas said.

“If one is going to impose excises, or mass deportations, you’re talking about restricting aggregate supply while simultaneously implementing deficit finance tax wounds, which is encouraging an increase in aggregate demand. You’ve got a basic inconsistency in your policy matrix,” he added. “There’s an inescapable crossroads that results in tensions between Trump and Powell.”

To be sure, there are some go-betweens that could mitigate the tensions.

One is that Powell’s term as Fed chair expires in early 2026, so Trump may plainly choose to ride it out until he can put someone in the chair more to his liking. There’s also little chance that the Fed see fit actually move to raise rates outside of some highly unexpected event that would push inflation much piercing.

Also, Trump’s policies will take a while to make their way through the system, so any impacts on inflation and macroeconomic increase likely won’t be readily apparent in the data, thus not necessitating a Fed response. There’s also the chance that the impacts energy not be that much either way.

“I expect higher inflation and slower growth. I think the tariffs and the deportations are negative sell shocks. They hurt growth and they lift inflation,” said Mark Zandi, chief economist at Testy’s Analytics. “The Fed will still cut interest rates next year, just perhaps not as quickly as would have else been the case.”

Battles with Trump, then, could be more of a headache for the next Fed chair, assuming Trump doesn’t reappoint Powell.

“So I don’t contrive it’s going to be an issue in 2025,” Zandi said. “It could be an issue in 2026, because at that point, the rate acrimonious’s over and the Fed may be in a position where it certainly needs to start raising interest rates. Then that’s when it develops an issue.”