With Trump’s return, the Fed is shaking, analysts are doubtful about Powell’s fate

Trump’s victory opens an important chapter in the history of the Federal Reserve and raises questions in the financial world: what will happen to the seat now occupied by Jerome Powell? Despite some sparks in the past, American presidents have always supported the impartiality and independence of the central bank. But it is also true that Powell – appointed by Trump in 2017 and confirmed by Biden for a second term in May 2022 – is now not well seen in Republican circles. “I would allow him to complete his term, especially if I thought he was doing the right thing,” Trump told Bloomberg Businessweek in an interview in June. But, last February speaking on Fox News, he defined him as “a politician” because by cutting rates, he would have favored the Democrats in the electoral race. In recent months, on another occasion, speaking to journalists at his Mar-a-Lago estate in Palm Beach, Florida, Trump again expressed doubts: “I’ve been very successful. And I think I have better instincts than that who, in many cases, is part of the Federal Reserve – or the president.”

The fact is that despite appointing him himself in 2017, two years later Trump had not digested some decisions of the central banker who, in his opinion, was not cutting rates quickly. And according to analysts, in the short term, these tensions could now regain strength. Meanwhile, the Fed, which is meeting today and will make its decisions public tomorrow, is at a delicate moment in its battle against inflation. In September, it decided on a jumbo rate cut, i.e. 0.50% in September and is preparing for a further reduction of 0.25% which is expected to be announced tomorrow.

But leaving rates too high (now at 4.75%-5%) which lead to an increase in unemployment and a reduction in demand can be considered a risk: for this reason, according to analysts, the new president will probably put pressure on Fed to cut rates. And that is precisely what the markets fear: seeing the Fed’s independence compromised. Furthermore, last April, the Wall Street Journal published an article describing in detail a plan by Trump’s allies to blunt the Fed’s independence and allow the president to be involved in interest rate decisions. However, Trump campaign managers Chris LaCivita and Susie Wiles said the report should not “be considered official”.

For his part, Powell has long argued that he and other Fed officials do not take politics into account when deciding on monetary policy. During his tenure, Powell led a strong economy subsequently rocked by the Covid-related economic downturn. When the pandemic ended, the United States found itself facing skyrocketing inflation, peaking at around 9% in the summer of 2022. However, analysts say Powell managed to achieve a “huge result” and that is, to “control inflation without entering into recession”. The Fed meeting that ends tomorrow is in fact the last one that can reasonably be based on current projections. “This is my fourth presidential election at the Fed,” Powell told reporters at his regular post-meeting press conference in July.

“Whatever we do before, during or after the election will be based on data, prospects and the balance of risks and nothing else.” Its fate, observers swear, will depend precisely on how it moves in the direction of a decline in rates. His mandate also expires in 2026. With Trump’s election, analysts remember when in 2018 and 2019 the president conducted a clear pressure campaign on the Fed, urging the central bank to “exploit the victory” of such an economy ‘ loudly and attacking Powell as “clueless”.

Even after the Fed actually began lowering rates in August 2019, Trump’s complaints did not stop. “My only question is: who is the greater enemy of our economy, Jay Powell or President Xi?” he wrote on Twitter. Powell rejected such pressure, and in a July 2019 Senate hearing he ruled: “We will always do our jobs objectively, based on data, with transparency, and do what we think is right for the U.S. economy.” On the other hand, relations between the White House and the central bank have not always been calm. For example, in 1965, President Lyndon B. Johnson allegedly summoned then-Fed Chairman William McChesney Martin to his ranch in Texas and pushed him against a wall following a decision to raise interest rates. But it is also true, and even presidents know it, that an independent central bank is essential to reap the benefits of economic and financial stability.