U.S. Federal Reserve Chair Jerome Powell may be heading toward a confrontation with President-elect Donald Trump in the coming months over high borrowing costs, according to analysts.
Trump’s pledge to lower interest rates and ease financial burdens on American families faces an uncertain future as many economists predict that interest rates may remain elevated for the foreseeable future.
If that is the case, Trump could find himself at odds with the Federal Reserve.
Chair Jerome Powell, appointed by Trump in 2018, has come under fire from the president in the past.
Trump frequently criticized Powell during his first term, accusing the Fed of keeping rates too high and hindering economic growth.
Seth Wenig/AP
Why Did Donald Trump Criticize Jerome Powell?
The public rebukes raised concerns about political interference with the Fed’s independence, a cornerstone of its effectiveness.
On Wednesday, Powell reaffirmed the importance of the Fed’s autonomy, stating, “That gives us the ability to make decisions for the benefit of all Americans at all times, not for any particular political party or political outcome.”
But Trump’s economic proposals, including significant tax cuts and broad tariffs, could fuel inflation in an already booming economy.
If inflation were to reaccelerate, the Fed could be forced to keep interest rates high, potentially conflicting with Trump’s agenda for lower borrowing costs.
Trump’s tax cuts, including those on wages and overtime, could further stoke inflation by accelerating economic growth.
Allison Robbert/Pool via AP, File
What Are The Dangers of Undermining Fed Independence?
Meanwhile, tariffs—another pillar of Trump’s trade policy—could disrupt supply chains, leading to higher prices.
In such an environment, the Fed might have little choice but to pause or even reverse its rate cuts, effectively undermining Trump’s plans.
The Fed’s key short-term rates influence some loans, such as credit cards and small business financing, but it has less control over longer-term rates, such as the 10-year Treasury yield, which directly affects mortgage rates.
Even as the Fed reduced rates in September, long-term rates began to rise.
This was partly driven by expectations of faster economic growth, which could lead to higher inflation and borrowing costs in the future.
Furthermore, Trump’s proposed tax cuts could widen the federal deficit, increasing the need for higher Treasury yields to attract investors.
Kent Smetters, an economist at the Penn Wharton Budget Model, said that the Fed’s influence over mortgage rates is limited.
He said: “Deficits are going to play a much bigger role,” suggesting that fiscal policies, rather than monetary ones, will likely have a stronger effect on long-term rates.
Could Trump Fire Powell?
The Fed’s independence is crucial to its ability to control inflation, which often requires making unpopular decisions, such as raising interest rates.
A politically pressured central bank could risk losing its credibility, leading to higher inflation expectations that could become self-fulfilling.
If markets and consumers believe that the Fed is bowing to political pressure, it could trigger an inflationary spiral, as businesses and individuals act on the expectation of rising prices.
Though Trump could attempt to remove Powell from his post, such a move would likely trigger a lengthy legal battle, with Powell likely prevailing in court.
Even if Trump succeeded in replacing Powell when his term expires in 2026, the move could unsettle financial markets, causing bond yields to rise and mortgage rates to increase.
Historically, persistent interference in central bank policy has led to economic instability.
In the 1970s, President Richard Nixon’s pressure on the Fed to cut rates contributed to the decade-long inflation crisis.
Economic experts warn that Trump’s approach could lead to similar consequences, undermining both the Fed’s ability to manage inflation and the public’s confidence in its decisions.
This article contains additional reporting from The Associated Press.
