The business angle: One nexus of Washington power that won’t see a leadership change is the Federal Reserve, where Jerome Powell’s four-year term as chair runs through May 2026. At least for now.
Trump, who appointed Powell as Fed chair, weighed firing him in a disagreement over interest rates in 2018. He backed off when advised he lacked the legal authority to do so.
But there’s a distinct risk the same tension over rates could flare up again, with important implications for the economy and financial markets.
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- Trump would like to see borrowing costs fall quickly as he moves aggressively to deliver on a campaign promise to boost economic growth.
- The Fed, as always, will proceed cautiously to avoid overheating an already solid economy and reigniting inflation.
“The economy is not sending any signals that we need to be in a hurry to lower rates,” Powell said on Thursday in Dallas.
The upshot: If frustrated by the Fed, Trump might once again try to undermine its prized protection from the kind of political interference that has wrecked economies in the past.
The new president could stoke opposition to the central bank among the public and in Congress, where Republicans are set to control both chambers. Lawmakers could pass legislation that would give the executive branch more say in monetary policy — or even do away with the Fed altogether.
Meddling by Trump “is going to be a bit of a challenge for the Fed,” Eric Rosengren, former president of the Federal Reserve Bank of Boston, said with his trademark diplomacy.
Catch up: Inflation has cooled substantially but remains above the 2 percent level the Fed considers ideal.
- The Consumer Price Index rose 2.6 percent in October from a year earlier, the Labor Department said on Wednesday, up from a 2.4 percent increase in September.
- CPI excluding volatile food and energy prices, which the Fed considers a better measure of underlying inflation trends, rose 3.3 percent, roughly where it has been for the past six months.
Why it matters: Despite last month’s lack of progress on prices, the Fed is expected to lower its main federal funds lending rate by a quarter of a percentage point next month, for a total reduction of one full point since it began cutting rates in September. But what happens next year is not clear.
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Central bank officials in September penciled in another full point of rate cuts in 2025, but several policy makers on Wednesday raised doubts about those projections.
- “It remains to be seen how much further interest rates will decline or where they might eventually settle,” Kansas City Fed President Jeff Schmid said in a speech.
Even a full point reduction would leave the federal funds rate at about 3.3 percent. It never got higher than 2.45 percent during Trump’s first term.
The X factor: Trump hopes to accelerate economic growth by cutting taxes and removing government constraints on businesses.
Economists warn that those steps, combined with his plans for strict immigration limits and expanded import tariffs, could spur another round of inflation that would force the Fed to pause or even reverse its rate cuts.
Bond investors, who are more obsessed with interest rates than the stock market, are worried. Yields on the benchmark 10-year Treasury have climbed to the highest level since May despite the Fed’s recent rate cuts, reflecting both expectations for sustained growth and the inflationary risks of Trump’s policies.
Hands off: History is rife with examples of inflation-riddled economies laid low by political meddling with the central bank, including in Argentina, Turkey, and Venezuela.
At home, Richard Nixon pressured then-Fed chair Arthur Burns to keep credit flowing to bolster his 1972 reelection campaign.
- Burns’s acquiescence added gasoline to an inflationary fire that consumed the US economy during much of the 1970s.
- The debacle led to the Federal Reserve Reform Act of 1977, which delineated the Fed independence on monetary policy while requiring it to be more transparent with Congress.
“Central bank independence is one of the great accomplishments of modern macroeconomics. It’s really worked,” said Kenneth Rogoff, a Harvard University economics professor and former chief economist at the International Monetary Fund.
Final thought: The odds are long that Trump will try to replace Powell before his term is over. The odds are good, however, that he’ll jawbone Powell for the kind of dramatic drop in interest rates that the central bank would almost certainly deem imprudent.
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“As a very good businessman and somebody that’s used a lot of sense, I think I have the right to say that, you know, I think I’m better than he would be,” Trump, referring to Powell, said in an interview with Bloomberg in October. “I think I’m better than most people would be in that position.”
Trump will get to pick a Fed chair in 2026. But in the meantime, he’s going to make Powell’s job miserable.
Larry Edelman can be reached at larry.edelman@globe.com.