In an attempt to avoid interfering, Federal Reserve officials will meet in Washington eight days after President Donald Trump returns to the White House to review the prospects for interest-rate policy.
“The Trump news cycle is still quite powerful. Derek Tang, leader of the LHMeyer research team that anticipates Fed policy, stated that Powell does not want to “kind of paint a target on the Fed” by implying in any manner that interest-rate policy “could interfere with the pursuit of the Trump agenda.”
Amid worries that the intentions and language of the Republican president who has returned to office may conflict with the central bank’s independence, the Fed had its first meeting since the day of the inauguration. The meeting comes after Trump made a series of remarks indicating that he wants interest rates to drop even more.
The central bankers are unlikely to stray from their goals to maintain stable interest rates, though. Fed policymakers have indicated that they want to pass on a rate-reduction opportunity at the January meeting, following last year’s full percentage point rate cut to a range of 4.25% to 4.5%.
The Fed’s independence and continued status as an inflation-targeting central bank are essential to the functioning of the whole global financial system. Markets will get extremely anxious if they begin to fear that this could change and that politicians will be making monetary policy decisions.UBS’s Brian Rose
The message has been received by the markets, as trading activity in derivative markets anticipates no reduction.
Powell will be careful to remain neutral on Trump’s economic policies and won’t rule out a rate decrease at the Fed’s next meeting, which is set for March, in order to avoid making headlines, Tang added.
Trump stated on Thursday that after he lowers oil prices, the Fed will have more leeway to soften. A group of business leaders in Davos, Switzerland, heard Trump say via video hookup that he will “demand that interest rates drop immediately.”
Tang added that if Powell is questioned about this during his press conference, he is likely to just remark that the Fed will react to changes in the economy and risk perceptions.
No justification for continuing to lower rates
UBS senior economist Brian Rose stated that he was not taking Trump’s remarks at the Davos summit too seriously.
“All he’s saying is that we’re going to allow more oil drilling, which should lower the cost. The Fed may lower rates if inflation slows. “I don’t think he’s going to coerce the Fed into making cuts when they don’t want to, at least not right now,” Rose stated.
Fed officials are refusing to give in to pressure as of yet. When asked on CNBC if the Fed will be affected in any way by Trump’s remarks to Davos, former Kansas City Fed President Esther George said, “No.”
“As we look at the disinflationary process that has been underway over the past months, it has seemed to stall out,” George stated. “We haven’t seen the kind of movement down towards the Fed’s target that would call for continued rate cuts.”
Carl Tannenbaum, chief economist of Northern Trust, stated that more confrontation between the Trump White House and the Fed is unavoidable, despite Fed officials’ attempts to avoid making headlines.
“Conditions are ripe for some difficult conversations between the White House and the Federal Reserve,” Tannenbaum stated. The Fed’s mandate for stable inflation and the goals of the Trump economic team “are on a collision course,” he continued.
Trump wants to pursue a pro-growth agenda, and the current level of long-term interest rates is not conducive to that, Tannenbaum said.
Lower interest rates and lower interest-rate expenses for the Treasury would be advantageous to Trump’s federal budget proposals.
Although most analysts anticipate that the Fed will implement the two rate cuts it has planned for 2025, the first one won’t happen until June.
Tannenbaum predicted that “the White House will probably want more sooner.”
Markets prioritize independence.
Still, other experts see a clash between Trump and the Fed as unlikely, given the other forces interested in keeping the system of Fed independence in place. Rose said markets will become very nervous if they think there is going to be political interference by Trump and his team in the Fed’s decision making.
“The entire global financial system depends on the Fed maintaining its independence and remaining an inflation-targeting central bank. If markets start to worry that that might change, that we’re going to have politicians deciding on monetary policy, markets will get very nervous,” Rose said.
Tang said he’s not too worried about a battle of words between the Fed and the White House. “The Fed has a strong base of support in Congress, [and] in financial markets, and that will really shield them against Trump doing anything drastic,” Tang said.
Vincent Reinhart, a former top Fed staffer and now chief economist at Dreyfus and Mellon, said lawmakers have given the Fed authority to set interest rates to give themselves protection from voters if things go wrong.
“The Fed’s independence is because it is there to be complained about,” Reinhart said.
Fed officials have to take criticism as part of the job, he added.
“That’s what got them a marble building,” he said.
