President-elect Donald Trump and Federal Reserve Chair Jerome Powell could be on a policy collision course in 2025 depending on how economic circumstances play out. Should the economy run hot and inflation flare up again, Powell and his colleagues could decide to tap the brakes on their efforts to lower interest rates. That, in turn, could infuriate Trump, who criticized Fed officials, including Powell, during his first term for not relaxing monetary policy quickly enough.
Joseph LaVorgna, former chief economist at the National Economic Council during Trump’s first term, expressed concern about a potential conflict, highlighting the challenge of decision-making when faced with uncertainty. The dynamic between Trump and Powell has been contentious since Powell became Fed chair in 2018, with disagreements over the direction of interest rates. Trump’s public criticism of Powell was met with the chair emphasizing the importance of the Fed’s independence from political pressures.
As Trump prepares to take office in January, the landscape is different from his first term, with plans for expansionary and protectionist fiscal policies. These policies, including tariffs, tax cuts, and increased spending, may lead to inflationary pressures. LaVorgna believes that the Fed may face a difficult choice in responding to these nontraditional policy approaches within a traditional economic framework.
Market expectations regarding future Fed actions have fluctuated, reflecting uncertainty about the Fed’s intentions. Tensions between the White House and the Fed are expected to persist, with potential conflicts arising from differing views on monetary policy. The struggle over interest rates could lead to political and policy tensions between the Federal Reserve and the White House.
While factors such as Powell’s term expiration and the timing of policy impacts may mitigate tensions in the short term, the potential for conflicts between Trump and the Fed remains. The interplay between Trump’s policies and the Fed’s monetary decisions could create challenges for the next Fed chair, particularly as the economic landscape evolves.
