As the Federal Reserve prepares for potential interest rate cuts, President Donald Trump’s frustrations with current Fed Chair Jerome Powell are likely to escalate. With Powell’s term ending early next year, the rumor mill is already churning that Trump could pursue the replacement of his choice to be more dovish. Instead, the central bank would start working on a process to lower its interest rate. This could be as soon as December depending on some key economic indicators pointing to a desire for a shift in monetary policy.
The Fed’s yet again cautious tune is a sign of a complicated economic picture. Since March inflation has hovered around zero with the last three month-over-month inflation readings at 0.1% and 0.2% from February to May. Increasing pressures are mounting that could require that long overdue change. The market now assigns virtually no probability to a cut in the next meeting, scheduled for this July. That might change quickly if we begin to see a clearer trend of deteriorating job growth and GDP.
President Trump’s Discontent with Powell
President Trump’s frustration with Jerome Powell has been well documented over the last two years. Second, he’s publicly and often criticized Powell for failing to be aggressive enough in fighting the growing economic challenges we face. As Powell’s term at the helm approaches its Lord-of-the-Rings-lengths expiration date, the possibility of a change in leadership at the Fed builds steam.
Trump’s preference for a more dovish Fed Chair dovetails nicely with his effort to pressure the Fed into cutting interest rates immediately. The President is correct that lower rates are the best way to stimulate economic growth in the face of another downturn. His frustration is compounded by the Fed’s cautious approach, which contrasts with his administration’s proactive economic strategies.
Moreover, two of Trump’s appointees to the Federal Reserve—Chris Waller and Michelle Bowman—may support his call for a rate cut. Their potential influence could play a pivotal role in shaping the Fed’s monetary policy as it navigates the uncertain economic waters ahead.
Anticipated Interest Rate Cuts
The Federal Reserve is already preparing to lay the groundwork for an interest rate cut. Some analysts already predict this cut may come before the end of the calendar year. With inflation currently under control and key economic indicators signaling a slowdown, the Fed could opt for a 50 basis point cut if evidence of declining jobs and GDP growth emerges.
Market analysts suggest that the July, August, and September Consumer Price Index (CPI) reports may reveal inflationary pressures due to tariffs, potentially registering 0.4% or even 0.5% month-on-month increases. This should alleviate fears of accelerating inflation. Moderating rents and stable energy costs are expected to offset these pressures.
Housing is in the midst of one of the biggest structural changes that market has experienced, and that too is pushing disinflationary forces. As rents settle, inflated housing costs should start to play a smaller role in the overall inflation picture. As a result, the Fed should weigh these concerns even more heavily as it decides how to adjust monetary policy going forward.
Economic Indicators and Job Growth
In recent years, the labor market has shown resilience, with nearly 90% of new jobs created over the past two-and-a-half years concentrated in three sectors: government, leisure and hospitality, and private education and healthcare services. This heavy focus makes it hard to argue for sustainability and diversification in the job picture.
Even with a strong jobs recovery, wage growth is muted enough that it will do little to push inflation higher on its own. The Fed’s challenge will be to balance these conflicting economic signals and to do so in the face of mounting pressure from Trump to lower interest rates. The Fed will have to tread a fine line here, admitting the reality of today’s economy while not sacrificing its vision for the future.