What Does the Trump Presidency Mean for the Fed?

The Federal Reserve cut interest rates by a quarter point following its November meeting.

That was widely expected and came as no surprise. The bigger story was Fed Chair Jerome Powell’s attempt to defend his job in the press conference that followed.

Reporter: “If [President-elect Donald Trump] asked you to leave, would you go?”

Powell: “No.”

Reporter: “Can you follow up on that? Do you think that legally you are not required to leave?”

Powell: “No.”

Powell was intentionally blunt. He takes the Fed’s independence seriously and wanted to drive that point home. But the fact that the question was asked at all raises a point: What does a Trump presidency mean for the Fed?

As a candidate, Trump loudly advocated for more presidential control over the Fed, and during his first term, he publicly toyed with the idea of firing Chairman Powell.

But how much of that is just campaign bluster?

And beyond questions of control, what effects might the new administration’s policies have on the Fed’s rate decisions?

Trump’s economic plans

Let’s tackle the policy question first.

The Trump trade is, in part, an inflation trade. Following his win for a second term, stocks sprung higher on the expectation of juicier corporate profits while bonds really took a beating. The reason for this essentially boils down to three overlapping issues.

The first is Trump’s tariff plan. The president-elect has proposed a blanket hike of 10% and tariffs as high as 200% in some cases. It’s unclear how much of that is intended to be real policy and how much is simply a negotiating tool. But the president has broad authority to set tariff rates, and Trump has made it clear that he sees higher tariffs as a major foundation of his economic plan.

We should remember that the U.S. is a services and information economy and tariffs are mostly irrelevant to those areas. But consumers will still feel the effects at the supermarkets and in stores.

This brings us to the second issue: labor. The labor market has been exceptionally tight for years due to the retirement of the baby boomers. Tight labor conditions have been hard on businesses and have contributed to inflation via the circular problem of the wage-price spiral. Higher prices lead to higher wages and vice versa.

Well, if Trump follows through on deporting millions of undocumented immigrants, the labor shortage will get even more acute. And a labor shortage will absolutely drive up inflation in the services and information sectors of the economy.

And then finally, there is the issue of tax cuts. Tax cuts are popular. Who doesn’t want to pay less in taxes? But without a corresponding decrease in spending, tax cuts are a recipe for even larger budget deficits. The multi-trillion-dollar budget deficits we’ve had since the pandemic have already been a major driver of inflation.

It’s hard to model exactly what the effects of all of this will be because we still don’t know what the tariff rates will be and what goods, exactly, they will apply to. We also don’t know the size of the deportations or the size of the deficits. But for what it is worth, the non-partisan Peterson Institute estimates that the inflation rate could climb as high as 6% to 9.3% by 2026.

Estimates like that should be taken with a large grain of salt, but they are enough to give the Fed heartburn. At the very least, it’s enough to make the Federal Reserve keep interest rates a little higher for a little longer… and possibly a lot higher for a lot longer.

What about Powell?

As for the Fed’s independence – and Jerome Powell’s job security – the outlook gets murky.

The Federal Reserve Act, which governs the central bank, says that “each member [of the Federal Reserve Board] shall hold office for a term of fourteen years from the expiration of the term of his predecessor unless sooner removed for cause by the President.”

But what does “for cause” mean? The Act doesn’t say. Could Powell’s handling of the inflation crisis be just cause for termination? The law isn’t clear.

Powell’s term finishes in May 2026. That means Trump will indeed be able to choose his successor, though he’ll need Senate confirmation.

Ultimately, all of this may be theoretical. Trump has a long history of making inflammatory statements intended to send a message but not necessarily create policy. The likelihood is that there is no serious attempt to undermine the Fed’s independence any time soon.

However, it’s also likely that the person Trump chooses to replace Powell in 2026 will be more inclined to keep rates low, even if that means taking a more lax approach to inflation.

There are a lot of “ifs” and “maybes” here. The reality is that we really won’t know ahead of time what impact the Trump presidency will have on inflation and the Fed’s reaction to it, though it’s clear that the Fed’s job, which was already complex enough, is likely going to get even trickier.

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