Jerome Powell, Chairman of the Federal Reserve, is getting ready for the next Federal Open Market Committee (FOMC) meetings. International turbulence looms as he steers through these consequential conversations. With the resignation of Governor Adriana Kugler, President Donald Trump has an opportunity to appoint Powell’s successor, further complicating the Fed’s landscape amid shifting economic indicators. So as we approach the July Employment Situation report, Powell’s legacy and his control of US monetary policy hangs in the balance.
It’s the next few FOMC meetings that may provide a dramatic plot twist. If Powell isn’t careful, he could wind up battling his successor, creating rifts on the committee in the process. If successful, this transition would have huge consequences. The current economic climate—characterized by weak labor demand and an impending potential recession—adds to this imperative. Furthermore, Trump’s recent comments regarding international legal matters and his administration’s policies are likely to factor into the discussions at these crucial meetings.
As the canary in the coal mine, the labor market — typically a barometer of economic health — is showing dangerous signs. That hiring slowdown in May and June raises alarm bells. Just 19,000 added in May and only 14,000 in June, both figures had economists shaking their heads and raising the alarm. Powell and the FOMC are looking for their next—and perhaps most important—July report to clearly turn the corner. It will provide extremely valuable information about where we are with job growth and the strength of our economy.
Implications of Leadership Change
With Governor Adriana Kugler’s recent resignation from the Fed, a new vacancy on the Federal Reserve Board creates such an opportunity. Now, President Trump has the chance to handpick Powell’s likely successor. This move comes along with considerable risk, including a loss of leverage for Powell and likely fissures between FOMC members. Now the economic landscape feels like it’s changed overnight. Choosing a new governor would make it much easier to change the committee’s priorities and the way they make decisions.
Trump’s position regarding various international issues, including Brazil’s President Jair Bolsonaro’s legal challenges and Canada’s recognition of Palestine, may play a role in shaping Powell’s tenure as Chair. These geopolitical concerns could inform how the Fed responds to domestic economic conditions, particularly in light of the administration’s protectionist stance toward trade and migration.
Economists warn that these changes could diminish Powell’s ability to chart a course through today’s economic challenges successfully or otherwise. As noted by BNP Paribas, “The immediate damaging effects of the administration’s tariff offensive on activity can be seen in the sharp drop in hiring in May (19k) and June (14k).” Such statements highlight the potential consequences of Trump’s policies on employment and overall economic stability.
Economic Landscape and Monetary Policy
Powell prepares for pivotal meetings. Second, he’s going to have to navigate a very, very hostile economic environment, characterized as it is by a slowdown in core private demand for the third consecutive quarter. Labor force participation is still down 0.8 million people to date. This decrease has brought the total participation rate down to 62.2%, deepening concerns over the need for new jobs and sustainable economic growth.
The chances of a rate decrease in September have skyrocketed to 92%. They have leapt from 43% to an astounding 83% according to the most recent implied data in the Fed Funds Futures market. Perhaps most importantly, market participants are looking for an acute monetary policy response to be at least somewhat accommodative. This pivot reveals their fear of the quickly worsening economic situation. Such concerns can help force Powell’s hand, pushing him away from hawkish expectations and toward a more dovish approach to FOMC discussions.
“The July Employment Situation report could prove to be a critical turning point for the FOMC,” remarked an analyst at BNP Paribas. This feeling mirrors the increasing suspense surrounding upcoming jobs numbers and what it could mean for decisions on monetary policy going forward.
US 10-year yields fell further, down 14 basis points to 4.22% just this week. This continued decline further makes Powell’s monetary policy strategy impossible. Coupled with a worrying inflationary picture, this sharp decline is likely to have implications for interest rates and borrowing costs in all sectors.
Navigating Challenges Ahead
Against this backdrop of tremendous challenges, Powell needs to be wary as he walks a tightrope laden with pitfalls. In fact, the harm done by Trump’s trade policies to US economic activity is at an all-time high. This failure is leading to new, urgent calls to rethink the tactics employed by the Fed. The continuation of an unprecedented economic downturn, as shown in both the jobs report and GDP numbers, casts doubt on Powell’s ability to lead.
As he takes the helm into the next FOMC meetings, Powell’s capacity to attend to these urgent matters will come under sharp focus. “The moment of truth is approaching for the Fed,” analysts suggest, emphasizing that decisions made during these meetings could have far-reaching consequences for both Powell’s future and the broader economy.