Potential for Tension Between Trump and Fed

January 28, 2025

During his first term as president, the relationship between the Trump and Federal Reserve policymakers was contentious. After the Fed Chairman then and now warned of adverse financial market repercussions from trade sanctions, Trump characterized Japan Powell as an enemy of America. It did not take long into that first term for Trump to sour on the Fed, which raised interest rates four times during 2017, acting at scheduled meetings in February, March, June and December of that year.

This week’s FOMC meeting is the first one during Trump’s second term, and it follows interest rate cuts made at each of the last three reviews in 2024. In December, however, monetary officials signaled that a pause in easing would likely be warranted. That message has been reinforced several times subsequently. The view is almost universal that no change in the federal funds target of 4.25-4.50% tomorrow. U.S. inflation backed up higher between September and December, and the economic growth and the labor market continue to exhibit resilience. Trump nonetheless has with the past week put some distance between the administration and the Fed by claiming he has a better understanding of interest rates than monetary officials.

U.S. data reported today do not warrant a rate change, up or down. The Conference Board’s measure of consumer confidence fell unexpectedly to 104.1 this month from 109.5 in December and 112.8 in November. The Richmond Fed manufacturing survey index rose six points in January but was still below zero at -4. House price inflation according to the FHFA and Case-Shiller indices stayed above 4.0% in November. And while total durable goods orders fell by 2.2% in December and 1.5% on average in 2024, the subset of orders for non-defense capital goods excluding ones for aircraft, which is a better barometer of future business investment, stayed in the block with gains of 0.5% between November and December and 0.6% on average for the year.

Tomorrow’s Fed announcement doesn’t coincide with an updated summary of economic projections. Powell is not expected to deviate much from his characterization of the economy after the prior meeting. The pause in policy will continue. Officials continue to believe that the existing policy is sufficient to return inflation to target, but the economy is behaving well enough that there is not an urgency to take the forecast as being without risk. Officials want to see more evidence of further deceleration, and decisions will be made meeting to meeting based on all the evidence at hand.

There have been only seven previous times since 1973 when FOMC members met under circumstances in which the president’s political party had just changed. At such times, the public is tempted to suspect that policy could be influenced by politics, and questions about Fed independence may arise at Chairman Powell’s press conference. They will be denied unconditionally. For what it’s worth, the clearest instance of timing being influence by politics occurred in November 1980 when the Fed did matched sales, a tightening action, on the day after Ronald Reagan defeated Jimmy Carter. Previously in May 1977, four months after Carter was sworn in, the Fed tightened by 50 basis points. A whole year of the Clinton presidency went by before the fed funds target was changed with a 25-basis point hike in February 1994. In January 2001, the key rate was reduced by 50 basis points 11 days after the inauguration of George W. Bush. Barack Obama inherited a deep recession and financial mess with a theoretical potential to have exceeded the Great Depression’s severity. The Fed funds rate was already at an effective low of 0-0.25%, and Fed officials creatively found quantitative tools to stimulate demand in other ways. A different sort of disaster, the Covid-19 pandemic, was nearing its first anniversary in January 2021, and no controversy surrounded the retention of very low interest rates at that time.

Tags: Trump versus Federal Reserve

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on Tuesday, January 28th, 2025 at 12:25 pm and is filed under Deeper Analysis.
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