As President-elect Donald Trump prepares to return to the White House in January, a potential clash with Federal Reserve Chairman Jerome Powell looms on the horizon, largely dependent on evolving economic conditions. If inflation rises and the economy overheats, the Fed may feel forced to slow the pace of interest rate cuts or even keep them stable. Such a move could put Powell on a collision course with Trump, who has historically criticized the Fed for not easing monetary policy quickly enough.
This potential tension is not new. Powell, appointed Fed chair by Trump in 2018, often found himself at odds with the then-president during his first term. Trump has publicly criticized Powell and the Fed’s decisions on interest rates, while Powell has argued that the Federal Reserve must remain independent from political influence.
Joseph LaVorgna, who served as chief economist at the National Economic Council during Trump’s first term, foresees the possibility of new friction. “Without a doubt,” LaVorgna said, when asked about the likelihood of conflict. He added: “If the president thinks rates should be lowered, does the Fed, just for public reasons, engage?”
The dynamic between Trump and Powell in 2025 will play out in a different economic context than when they first met. Under Trump’s initial presidency, inflation was relatively low, and Fed rate hikes also kept borrowing costs well below today’s levels. However, the fiscal policies proposed by Trump for his second term, which are expansionary and protectionist in nature, could create new challenges. His agenda, which includes tougher tariffs, lower taxes and increased government spending, could push the Fed to maintain a more cautious stance on monetary policy to keep inflation under control.
LaVorgna, now chief economist at SMBC Nikko Securities and rumored to be a potential pick for a role in the new Trump administration, believes the Fed may face difficulty adapting to Trump’s unconventional economic approach. “They will look at it through a traditional economic lens, but the policy that Trump is pursuing is anything but traditional,” he said.
Market uncertainty over the Fed’s moves
Recent changes in market expectations reflect growing uncertainty about the Fed’s next steps. According to data from CME Group’s FedWatch indicator, futures traders, who had previously predicted another rate cut before the end of the year, they are now less confident. Projections of tariff reductions through 2025 have also been significantly scaled back in recent weeks.
This hesitation stems in part from comments by Fed officials, including Governor Michelle Bowman, who recently stressed that progress in reducing inflation has stalled. Such remarks signal a potential reluctance within the Fed to accelerate rate cuts, although some observers expect the central bank to remain cautious.
Joseph Brusuelas, chief economist at RSM, predicts that these different priorities will lead to inevitable friction between the White House and the Fed. “All roads lead to tensions,” he said. “It won’t just be the White House: it will also be Treasury, Commerce and the Fed that will intersect.”
Trump’s economic team, expected to be composed largely of loyalists, will likely push for policies that require supportive monetary conditions. For the Fed, this means pursuing a neutral interest rate policy, balancing growth and inflation. For Trump, however, the definition of “neutral” could mean lower rates to enable his ambitious fiscal plans.
“The fight over where rates should be will create political tension,” Brusuelas said. “If you impose tariffs and cut taxes and increase deficits, you simultaneously limit supply and increase demand. This is a recipe for inflation and forces the Fed into a difficult position.”
Mitigate potential clashes
Despite these potential flashpoints, several factors could help reduce tensions between Trump and Powell in the near term.
First, Powell’s term as Fed chair expires in early 2026, raising the possibility that Trump may simply wait to nominate someone more in line with his views. Additionally, Trump’s fiscal policies will likely take time to affect the economy as a whole, meaning any inflationary pressures or impacts on growth may not immediately require a response from the Fed.
Mark Zandi, chief economist at Moody’s Analytics, believes that while Trump’s agenda could create inflationary pressures, the effects may not be severe enough to provoke a strong Fed reaction in 2025. “I expect higher inflation and growth slower,” Zandi said. “Tariffs and deportations are negative supply shocks: they damage growth and increase inflation. But the Fed will probably cut rates again next year, but not as quickly as it might have otherwise.”
Zandi sees the real risk of conflict emerging later in the decade. “I don’t think it will be a big problem in 2025,” he said. “But by 2026, the Fed may have to start raising rates again, and that’s when tensions could rise.”
Ultimately, the relationship between Trump and Powell could set the tone for U.S. economic policy in the coming years. While their different approaches to interest rates and managing inflation may re-emerge as a source of friction, much will depend on how economic conditions develop and whether both sides can avoid turning political disagreements into full-blown conflict.
