Meanwhile, the Federal Reserve is preparing to cut borrowing costs with this meeting—the first reduction in nine months. This decision occurs amid growing fears of a slowdown in the labor market. This expected decision arrives at a time when inflationary pressures have emerged, largely due to the economic policies of President Donald Trump—specifically his tariffs. The Consumer Price Index (CPI) data indicates a 2.9% rise in August compared to the previous year, aligning with economists’ predictions and further complicating the Fed’s policy landscape.
As the Fed wrestles with these economic currents, it must contend with the political climate that has embroiled its leadership for much of the past year. President Trump has actively sought to reshape the Fed’s Board of Governors, including a recent legal challenge involving Fed Governor Lisa Cook. With this picture as context, the macroeconomic state of labor markets will become a primary focus in next week’s policy announcement. Future inflation trends will be another big topic of discussion.
Fed’s Response to Labor Market Weakness
Fed Chair Jerome Powell has acknowledged that “downside risks to employment are rising,” highlighting the urgency for the central bank to consider adjustments to interest rates. Impact of the proposed rate cut on economic activity. This action is a welcome move given the change signals in the labor market that a slowdown may be warranted.
The consequences of Trump’s influence on the Fed are starting to play out. He has consistently advocated for a board majority that closely mirrors Republican viewpoints. Trump’s top economic adviser, Stephen Miran, was quickly confirmed to the Fed’s Board of Governors. This speedy move underscores just how potent the ongoing national campaign has been. Miran’s appointment process only took a month from nomination to swearing-in. Now, he is empowered to be a part of those big decisions, including voting on the rate cuts.
In this new paradigm, a number of Fed officials are starting to see any rise in inflation as something transitory. San Francisco Fed President Mary Daly asserted that “tariff-related price increases will be a one-off,” suggesting that the current inflation levels may not persist long-term.
Inflation Trends and Economic Policies
Inflation has snuck up the last few months, mainly a result of Trump’s reckless policies. As several economists have pointed out, though the CPI went up repeatedly, about half of this increase is attributable to the effect of import tariffs. Christopher Waller, a prominent Fed official, stated, “Inflation has increased since the first quarter, but these numbers include the effects of import tariff increases, which… I continue to expect will only temporarily raise inflation.”
Waller further elaborated on forecasts for inflation trends, indicating that “most forecasts are for 12-month inflation to continue to slowly increase for a couple more months,” with expectations that tariff effects will dissipate by early 2026. This inflected perspective should help take some of the heat off the Fed as it considers what to do with policy moving forward.
As the Fed heads into its meeting, it is still navigating an increasingly tricky dynamic of labor market strength and inflation fragility. Tricky decisions await between monetary easing and a fear of rising inflation. They need to consider the constant political pressure that’s coming from this administration.
Political Tensions Surrounding the Fed
The history of the Trump administration’s relationship with the Fed has been one of unusual hostility. Trump has long criticized Fed Chair Jerome Powell for not cutting interest rates soon enough. This boldness of criticism has sharpened calls for reform to the central bank’s leadership structure. Recent moves, such as efforts to oust Cook from her post, have only made these tensions more evident.
An appeals court recently rejected Trump’s attempt to oust Cook, allowing her to remain in her role while her lawsuit against the administration progresses. This ruling highlights the continuing legal challenge to Trump’s attempt to exert influence on the Fed.
Trump’s administration has seized on the Fed’s ongoing $2.5 billion renovation of its Washington headquarters as an opportunity to challenge Powell’s leadership. The extensive renovation project has since become ground zero for that criticism. Trump’s denunciations would have us believe that such spending exposes incompetence at the Fed’s mismanaged central bank.
Miran’s commitment to ethics and to the federal law was all show. His prior commitment to develop his own independent views on economic policy would make him a stabilizing force within the Fed. His future role in shaping policy debates will surely be watched as the Fed continues to steer through these complicated headwinds.