TLDR
- Trump demands lower interest rates and plans direct talks with Fed Chair Powell
- Fed officials signal caution on rate changes, citing persistent inflation concerns
- Market expectations shift from four possible rate cuts in 2025 to two or fewer
- Economists, including Ken Rogoff and Nouriel Roubini, suggest rate hikes are possible
- Fed’s independence could face challenges under Trump administration
The Federal Reserve enters 2025 facing mounting pressure from President Trump to lower interest rates, even as the central bank maintains a cautious approach to monetary policy.
At his virtual appearance before the World Economic Forum last week, Trump stated he would “demand” lower interest rates, setting up a potential clash with Fed officials who have indicated rates may remain stable for the foreseeable future.
Trump’s comments went beyond mere suggestions, as he told reporters he expects rates to come down “a lot” and plans to speak directly with Fed Chair Jerome Powell “at the right time.” This stance marks a return to his previous pattern of attempting to influence Fed policy, reminiscent of his first term when he frequently criticized Powell’s decisions.
The Fed’s current position reflects a more reserved outlook than previously anticipated. After implementing a full percentage point rate reduction at the end of 2024, Fed officials have revised their projections for 2025, reducing the expected number of rate cuts from four to two.
Market analysts and economists are adjusting their expectations accordingly. Harvard economist Ken Rogoff told Yahoo Finance that he doubts the Fed will implement even the two predicted cuts, suggesting that “the odds of a hike are the same as the odds of a cut.”
BNY CEO Robin Vince, speaking at the World Economic Forum in Davos, Switzerland, emphasized the need for preparedness in all scenarios. While he believes rate hikes are possible, Vince indicated that a pause in rate adjustments appears more likely as the Fed evaluates current economic conditions.
The possibility of higher rates has gained traction among economic experts. Nouriel Roubini, CEO of Roubini Macro Associates, projects zero cuts for 2025 and won’t rule out rate increases, particularly if core inflation trends higher.
Fed officials have expressed growing concern about persistent inflation, citing this as a key factor in their cautious approach. Some officials have privately voiced worries that Trump administration policies on trade and immigration could create additional upward price pressure.
Recent statements from Fed leadership suggest a deliberate approach to policy changes. Federal Reserve governor Michelle Bowman characterized the December rate cut as the “last step” in the Fed’s “policy recalibration,” while Kansas City Fed president Jeff Schmid advocated for gradual rate adjustments.
The central bank’s independence faces potential challenges under Trump’s presidency. During his campaign, Trump argued that the president should “have a say” in Fed decisions, though he stated last month he has no plans to remove Powell before the chair’s term ends in 2026.
Powell has maintained his position on the Fed’s autonomy, stating there is “no legal authority” for his removal before his term concludes. This stance sets up a potential conflict with Trump’s views on monetary policy.
Market expectations for the Fed’s immediate future suggest stability. Investors are betting against any rate changes at the conclusion of the Fed’s two-day meeting in Washington, D.C.
Recent economic forecasts from the Fed include adjusted projections that account for Trump’s proposed policies. During a press conference, Powell acknowledged that some officials had begun incorporating “highly conditional estimates of economic effects of policies” into their forecasts.
Wall Street economists are preparing for various scenarios. Bank of America economists noted after the December jobs report that while they expect an extended hold on rates, risks for the next move lean toward a hike rather than a cut.
Barclays’ analysis, led by Jonathan Millar, suggests any shift from the current policy trajectory would require clear evidence that the Fed’s 2% inflation target is at risk through 2027. Their research indicates that historical precedent shows such changes typically come with advance warning and multiple indicators of economic overheating.
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