As Jerome Powell faces the aftermath of Donald Trump’s re-election, the Federal Reserve is under new scrutiny. Powell’s timing on interest rate changes has been widely criticised—raising rates far too late in the inflation cycle and slashing them prematurely in recent months. This questionable timing left the Fed scrambling to manage runaway inflation and exposed it to Trump’s renewed influence over monetary policy.
The Chairman made it clear that he does not intend to be pushed around. Not one to cave under political pressure, Powell firmly stated that he wouldn’t resign if asked by Trump, asserting that the president lacks the authority to fire him or other senior Fed officials. By firmly stating that none of us can be “downgraded”, Powell essentially says the FED top brass are all together. It’s a declaration that the elected president may influence the future of the Fed, but only when there are vacancies to fill. It was particularly striking to hear Powell dig in, especially since he was otherwise doing his best to sidestep every politically tinged question from reporters. He avoided speculating on Trump’s potential policies but didn’t hesitate to stand up for the institution he has served since 2012.
Trump’s win creates a renewed power struggle between the central bank and a president who believes he should have a direct say in interest rate policy. Trump’s turbulent relationship with Powell is no secret. After nominating him in 2018, Trump quickly soured, lambasting Powell for raising rates. Meanwhile, Trump has tempered his rhetoric slightly, suggesting in June that he would let Powell finish his current term. Vice Chairman for Supervision Michael Barr could be Trump’s first target, given the regular Republican critiques of his approach to banking regulation. Senator Bill Hagerty, a potential Trump cabinet pick, suggested “everything should be on the table” concerning Barr’s role.
With Trump’s return, the Fed can expect even less independence. Trump has long insisted that he should have a say in monetary policy, particularly in shaping interest rates. Now, armed with a new Senate majority and his eyes on reshaping the Fed’s approach, Trump will likely demand looser monetary policy to align with his economic agenda—further tax cuts, aggressive tariffs, and a harder stance on trade. These policies, bound to be inflationary, could push the Fed into an awkward position: how to fulfil its mandate for price stability while meeting the political pressures of a president who prizes growth at any cost. With Trump’s allies now controlling the Senate, more conservative-leaning judges and officials will likely be appointed, impacting U.S. monetary policy for years. Trump’s approach to the Fed has always been about flexibility—his flexibility. We can expect increased pressure on Powell to curb interest rate hikes and favour stimulus measures, even if it means disregarding inflation risks.
On the policy front, the Fed cut rates by a quarter point, its second consecutive cut. Despite plans for further reductions in the coming months, Trump’s re-election has tempered expectations around the depth of the Fed’s cuts. With Trump’s talk of aggressive tariffs, stricter immigration policies, and extended tax cuts, inflationary pressures—and perhaps long-term rates—could rise. Powell maintained that future policy decisions would hinge on economic data, not fiscal or trade manoeuvres. “we don’t know when or to what extent monetary policy adjustments will come,” he said. “we don’t yet know what impact these policies will have on our maximum employment and price stability goals.”While Powell is open to further rate cuts, he left the timeline vague. He”left the door open to a possible pause at the December meeting if data remains strong and inflation stubbornly high.
The Fed’s credibility has been already stretched, having flip-flopped between rate hikes and cuts within mere months. As Trump’s policy objectives reshape monetary decisions, the Fed’s reputation for independence could suffer considerably. Global markets, already rattled by inconsistent Fed signals, may face even greater volatility, with traders forced to interpret policy signals coloured by political motivations. In short, Powell and the Fed are entering a new era under Trump’s second term—one where political pressure will likely overrule economic caution. The Fed’s balancing act is about to become more precarious as it tries to maintain stability amidst inflationary risks, tariff-induced price pressures, and the looming reality of a politically reshaped economic landscape. If the Fed thought it had a tough 2023, Trump’s second term may make it seem like a warm-up act.