By Jeanna Smialek
Within the Federal Reserve’s main building that overlooks Constitution Avenue in Washington, D.C., any casual references to the new Trump administration are careful and rare. This is intentional.
Donald Trump’s first term was characterized by a tense relationship with the politically neutral Fed. The president pressed central bankers to reduce interest rates more swiftly and significantly than they deemed appropriate for the economy. When officials declined to bend, he criticized them as “boneheads” and an “enemy.” He even hinted at the possibility of dismissing Fed Chair Jerome Powell. His attempts to place allies in central bank leadership positions were unsuccessful.
As the Fed braces for a new Trump administration with interest rates currently higher than at any time during his initial term, it appears tensions are set to heighten once more — and the central bank is remaining vigilant.
Analysts at the Fed are cautious about casually mentioning tariffs in email or Microsoft Teams discussions, concerned that such information might leak and portray the Fed as anti-Trump, according to a staff economist who requested anonymity due to the sensitive nature of the topic. Conversations in the hallways have taken on a negative slant but often remain deliberately vague and non-partisan, according to sources familiar with the atmosphere who also asked for anonymity. While Fed officials and economists are starting to evaluate what Trump’s proposed policies could mean for growth and inflation, they have steered clear of publicly speculating.
Central bankers are essentially keeping a low profile to avoid drawing attention. However, despite their efforts, they seem fated for another confrontation with Trump.
The president-elect has campaigned on promises of “unprecedented interest rate cuts.” Fed officials have begun to cut rates since September and plan to continue lowering them as inflation eases, yet they are unlikely to decrease rates to the extent Trump desires.
A mix of robust growth, a strong labor market, and persistent price increases may lead to slower rate cuts by the Fed in 2025 than central bankers had anticipated as recently as September. Trump’s policies could delay rate reductions further if they appear likely to drive inflation higher.
In an optimal scenario, however, very few economists predict that Powell’s Fed will revert its policy rate to the near-zero level witnessed in 2020 — the context that allowed for the historically low mortgage rates Trump claims he will restore.
Indeed, the beginnings of a confrontation between Trump and the Fed could emerge as soon as this week. Fed officials are ready to cut rates in December while unveiling their first round of economic forecasts since the election, which are largely expected to indicate a shallower trajectory for rate cuts in 2025 compared to previous expectations.
The Fed significantly raised rates in 2022 and 2023 to cool the economy and tame soaring inflation, but they began to lower borrowing costs in September this year due to easing inflation and a softening job market. Current rates are approximately 4.6%.
While officials previously anticipated reducing interest rates to 3.4% by the close of 2025, recent economic events have led economists and investors to doubt they will permit rates to drop that low.
Growth has been stronger than expected, and the job market appears to have stabilized since September. There exists a risk that lowering rates too rapidly could ignite the economy and cause inflation to remain slightly elevated.
“Growth is certainly stronger than we anticipated, and inflation is running a bit higher,” Powell stated at The New York Times’ DealBook Summit this month. “The positive aspect is that we have the capacity to be somewhat more careful as we seek to find neutrality.”
In fact, Trump’s own policies may complicate matters for the Fed in terms of sharply reducing rates. The president-elect has pledged to raise tariffs on U.S. trading partners and increase deportations, policies that could lead to rising prices.
It’s clear why a gradual and moderate series of rate cuts from the Fed could frustrate the incoming president: If interest rates remain elevated for an extended period, consumers and businesses are likely to feel the pinch of high borrowing costs, making financing a home or corporate expansion more expensive.
However, it is less evident what actions Trump may take in response.
At least in the short term, Trump cannot disrupt the Fed’s leadership structure. President Joe Biden reappointed Powell as chair, and his current term won’t end until mid-2026.
Attempting to fire Powell also seems improbable. Powell has asserted that he does not think the White House possesses the legal authority to terminate him, and that he would not resign if requested. Moreover, Trump has indicated he does not intend to attempt to remove the Fed chair this time.
“No, I don’t believe so. I’m not seeing it,” Trump responded when asked about potentially ousting Powell in an NBC interview aired on December 8.
However, even if the president refrains from seeking Powell’s removal, he will have the opportunity to eventually appoint a new Fed chair. Additionally, there are means by which he could make the Fed chair’s role more challenging in the meantime. Foremost among these, he seems ready to again criticize the Fed publicly.
Such criticism would not compel the central bank to alter its course: The Fed operates independently of the White House, and its leaders have previously demonstrated their willingness to resist Trump. Nevertheless, it could gradually undermine the Fed’s standing among voters and the legislators who represent them.
In the long run, that could be significant. While Fed officials are insulated from the White House, the institution ultimately answers to Congress, which retains the power to amend the legislation that grants authority to central bankers.
