WASHINGTON (TNND) — Up to this point in his second term, President Donald Trump has been silent about Federal Reserve Chairman Jerome Powell’s handling of monetary policy, especially as the president peels back several layers of the federal government. But that could change by the end of this week after Fed officials meet to discuss where interest rates should go.
During his campaign, Trump often railed against how Powell handled interest rates leading up to the 2024 election. The president and many of his supporters at the time implied a rate cut in October was an attempt to juice the U.S. economy in a bid to help then-Vice President Kamala Harris’ presidential bid.
Trump even suggested he as president should have more of a say in the direction of rates, arguing that he, not Powell, would be a better judge of monetary policy.
But that was then, and this is now.
Shortly after winning, Trump brought in billionaire Elon Musk’s Department of Government Efficiency (DOGE) to help him wallow out parts of the federal government. DOGE focused on the Consumer Financial Protection Bureau, USAID, and other parts of the State Department as Musk’s engineers looked to slash programs and lay off staff.
Trump also kick started a tariff war against Canada and Mexico, while adding more trade restrictions on Chinese imports. All three countries are major trade partners with the U.S. The on-again-off-again moves rattled financial markets, and have, to some extent, caused the stock market to slip into correction territory.
That’s prompted some economists to raise concerns about a possible recession, while his conservative supporters worry positive economic returns are a long way off.
Trump believes Americans are already seeing benefits.
He was asked Friday by Full Measure’s Sharyl Attkisson “how long Americans should wait before they say ‘wow'” in terms of seeing economic gains from his policies. Trump cited Apple’s expected investments in production plants, and argued soon “the economy will roar; the stock market will do great.”
But Trump’s policies in the early going are making life difficult for Powell, as he and Fed officials whittle away at post-pandemic price increases. Powell still hopes to bring prices down to the bank’s traditional 2% inflation target without harming the labor market.
Most economists are expecting a prolonged economic slowdown as a result of Trump’s tariff regime, but U.S. Treasury Secretary Scott Bessent disagrees. He said there will be a drawdown but that tariffs should be thought of as a one-off price that’s mostly transitory.
“I would hope that the failed ‘team transitory’ could get back together and think that nothing is more transitory than tariffs,” Bessent said at a luncheon in New York earlier this month. That’s a reference to a word that came to haunt Powell and the Biden administration as the post-pandemic economy opened.
The Fed held off on rate hikes despite supply chain crimps, causing inflation to balloon to near double-digit highs in 2022. At the time, policy makers and former President Joe Biden chalked up the price jumps to a blip during the transition away from economic lockdowns.
Powell is aware that he could be stepping into a similar situation this time around.
If it turns into a series of things and it’s more than that, and if the increases are larger, that would matter,” Powell told a reporter earlier this month when asked whether Trump’s tariffs could have long-term inflationary impacts. “And what really would matter is what’s happening with longer-term inflation expectations.”
If inflation accelerates in the months ahead, then officials will parse through reports for any signs — however small or large — that tariffs are the culprits, according to Fed governor Christopher Waller.
We call that a signal extraction problem,” Waller said in a recent interview. “You get this data point, and you’re trying to find the signal of what’s fundamental and what is maybe tariff noise, and that’s tough.”
Waller is considered a possible successor to Powell, whose term ends next year. He is beginning to signal a more dovish posture on rate cuts, arguing Fed policy makers should do as Bessent suggests and consider looking through tariffs.
Powell has reiterated several times in the past the importance of the Fed’s independence from the White House.
It’s also possible interest rates are not a top priority for the Trump White House right now, according to Bloomberg analyst and commentator Joe Weisenthal.
Weisenthal gave several examples, like tariffs on Canada, which limit the amount of lumber into the U.S. Limiting lumber supply would counteract the positive impact easing up on interest rates would have on mortgage rates and the overall housing market, he argued.
Lower interest rates could also help reduce the U.S. deficit, yet Trump’s policies are complicating this area, too.
It’s hard to square this kind of genuine interest in the absolute size of the deficit with the commitment to maintaining tax cuts,” Weisenthal wrote, referring to Trump’s push to extend his 2017 tax cuts. He added that tariffs are the president’s primary focus, meaning the Fed is getting put on the backburner — for now.