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The US Federal Reserve is on a collision course with Donald Trump, economists say, with the central bank set to keep interest rates on hold despite the president’s calls to reduce borrowing costs by “a lot”.
The Fed’s decision on Wednesday is the first following Trump’s return to office, which has been marked by a flurry of executive orders as the US president seeks to impose his agenda on Washington.
Analysts say that Fed chair Jay Powell will have to resist White House pressure if he is to retain the confidence of markets and avoid unleashing a new wave of inflation.
“When presidents start meddling in monetary policy decisions, it can often go very badly,” said Claudia Sahm, chief economist at New Century Advisors and a former Fed official.
“Cutting the interest rate when inflation is still not back down to target could create more inflation. There is a reason why the Fed is independent,” Sahm said, adding that she expected the central bank to “stick to its goals”.
Powell has helped steer the US economy towards a soft landing over the past year, curbing price rises without pushing the economy into recession.
But inflation remains above the central bank’s 2 per cent target, even though it has eased sufficiently for the Fed to cut interest rates last year by a percentage point to a range between 4.25 to 4.5 per cent.
While the market widely expects the Fed to keep rates on hold on Wednesday, Trump has made clear he wants much faster reductions.
“I think I know interest rates much better than they do, and I think I know them certainly much better than the one who’s primarily in charge of making that decision,” the president said last week. “I’d like to see [interest rates] come down a lot.”
Lawrence Summers, who served as Treasury Secretary under President Bill Clinton, argued that such “public interventions by governments can easily be counterproductive”. He added: “The Fed won’t listen.”
Central banks across the world were granted full control to set interest rates after a wave of inflation during the 1970s and 1980s proved difficult to tame in an environment where political interference in monetary policy was rife.
Few elected leaders have interfered in rate-setters’ decisions since, with exceptions such as Turkey’s President Recep Tayyip Erdoğan undermining market confidence and stoking price pressures.
“Now that Trump has been calling quite vocally for lower interest rates, if the Fed eases monetary policy it will create the impression that they caved to him and forfeited their independence,” said Isabella Weber, economist at the University of Massachusetts Amherst.
The US central bank is already set to cut interest rates less aggressively than its counterpart in the Eurozone.
The possibility of several price shocks hitting the US economy — including ones instigated by the president himself — could also delay the two cuts that most Fed officials and markets expect this year.
Some think that the Trump administration’s plans for tariffs and tax cuts, as well as a possible uptick in economic activity and in the markets, will prohibit lower US borrowing costs.
“Unless there is a collapse in financial market exuberance, which I think is a real possibility, my guess is that the Fed will have difficulty in cutting as much as it expects,” Summers said.
The central bank itself is keen to play down tensions with the White House. Powell is expected to duck questions on politics and avoid mentioning Trump by name in his post-meeting press conference on Wednesday.
“In the transcript for [the] December [press conference] the name of the president appears once in total. And that’s because a reporter used it,” said Vincent Reinhart, chief economist at BNY investments and a former Fed official. “Powell doesn’t want to talk about politics.”
Economists expect that the Fed chief will instead stick to the central bank’s script, emphasising that rate-setters will follow the data, rather than trying to anticipate the impact of Trump’s policies.
Some see a danger that such an approach would result in the Fed underplaying the threats in bringing inflation down to 2 per cent, especially in the guidance it gives.
“They can’t act in advance of political decisions that are uncertain. So they cannot provide satisfying guidance about policy,” said Reinhart.
Despite his demands on the Fed chief, Trump has indicated that he would not remove Powell from his post before his term as chair ends in May 2026. Powell has signalled he would fight against in the courts if the president attempted to oust him.
Some view the pressure on the Fed as part of the trade-off for being able to set rates as its officials see fit.
“The most persuasive argument for why politicians decided to make central banks independent is that they wanted somebody else to blame, said Reinhart.
“That means the quid pro quo for being independent is being criticised. And Chair Powell appreciates that,” he added. “A central banker is going to be disliked.”
Data visualisation by Joel Suss in London
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