IS TRUMP ABOUT TO FIRE THE FED CHAIR? / PROJECT SYNDICATE

Is Trump About to Fire the Fed Chair?

While a new Fed chair might immediately lower short-term rates, the longer-term rates that matter to households and businesses – rates for business loans and home mortgages, for example – are set by markets, not by the Fed. And markets will ensure that those rates rise.

Michael R. Strain

WASHINGTON, DC – US President Donald Trump reportedly polled a group of House Republicans last Tuesday about whether he should fire Federal Reserve Chair Jerome Powell, even showing them a draft termination letter. 

Firing Powell would be a huge mistake on the merits – and it would increase interest rates at a time Trump wants to see them lowered.

As Trump’s frustration with Powell has grown, his attacks have escalated. 

He nicknamed the chairman “Too Late,” referring to the Fed’s failure to recognize accelerating inflation in 2021 and to Powell’s decision not to cut rates in 2025. 

He then wrote Powell a handwritten note arguing that the Fed has “cost the USA a fortune” by not lowering rates. 

He is now going after Powell over the cost of renovating the Fed’s headquarters.

Powell and his Fed colleagues have kept the policy rate at around 4.3% since Trump took office in January. 

The president thinks the Fed’s policy rate should be close to 1%. 

Trump is clearly wrong – and the Fed has done the right thing by not cutting rates this year.

Consider current economic and market conditions. 

The weight of the evidence clearly indicates that the Fed’s decision not to cut rates earlier this year has not led to a weak labor market, below-target – or even meaningfully decelerating – inflation, or tight financial conditions.

The unemployment rate is low and is not trending up, standing at 4.1% – the same rate as 12 months ago. 

The rate has gone up by ten basis points since January, but fell in June relative to May. 

According to my calculations, the economy added an average of 111,000 net new payroll jobs per month in the first quarter of 2025, lower than the second quarter’s average of 150,000. 

And there is no sign in the data on layoffs or unemployment benefit claims that this will change anytime soon.

Meanwhile, consumer price inflation is well above the Fed’s target of 2% and has arguably accelerated slightly. 

Core inflation as measured by the Consumer Price Index (CPI) was 2.9% in June, up from 2.8% in May and the highest monthly rate since February. 

Core inflation as measured by the personal consumption expenditures (PCE) price index has also accelerated mildly in the second quarter of this year, and I expect the June data (which will be released at the end of this month) to show higher inflation relative to May.

The Fed sets the policy interest rate with the hope of influencing overall financial conditions, including broad equity values, interest rates, credit spreads, and exchange rates. 

A 4.3% federal funds rate does not seem to have been high enough to tighten those conditions. 

According to Goldman Sachs’ measure, for example, financial conditions are looser than they were at the start of the year.

That does not mean Trump is right about the Fed’s interest-rate decisions in the first half of 2025. 

But monetary policy operates with lags, and the Fed should be making rate decisions in the second half of this year with the goal of influencing economic conditions further into the future.

At the time of this writing, markets think the odds of the Fed cutting rates by the end of the year are over 93%. 

Perhaps. 

There are clear risks to the outlook. 

Consumer spending has flatlined this year. 

In fact, last week’s retail sales data show a slight spending decline in June relative to March. 

In addition, tariff-related price hikes are coming, which will reduce households’ purchasing power and slow consumer spending. 

And labor demand is clearly cooling.

All this might imply that a forward-looking central bank should be considering cutting rates in the second half of this year. 

The complicating factor, of course, is price increases from tariffs. 

Textbook analysis suggests that the Fed should ignore tariff increases, which are a one-time supply shock that will change relative prices, not the overall price level. 

But there are plenty of reasons to be concerned that the trade war could lead to an increase in underlying inflation.

For example, according to the University of Michigan consumer survey, households’ medium-term inflation expectations show a large and troubling spike, likely due to the trade war. 

Even though these expectations have receded in recent months, they remain worryingly elevated. 

Given how important inflation expectations are in shaping actual inflation, the Fed will need to proceed with caution as it considers whether to reduce rates later this year.

Trump wants lower interest rates, but firing Powell would spook markets. 

While a new Fed chair might immediately lower short-term rates, the longer-term rates that matter to households and businesses – rates for business loans and home mortgages, for example – are set by markets, not by the Fed.

Firing and replacing Powell would make investors nervous about the stability of the Fed and its ability to deliver low and stable price inflation. 

This would push longer-term interest rates up – the opposite of Trump’s goal.

Last Wednesday, Trump denied that he is planning on firing Powell. 

But even if Trump waits until Powell’s term is up, installing a chair whom markets think would do the president’s bidding would have a similar effect on longer-term interest rates.

The Fed’s independence has been one of the most important and stabilizing developments in economic policy in decades. 

Trump would hurt businesses and households by damaging it. 

Perhaps more importantly for the president, undermining the Fed’s independence would hurt his own economic and political goals.

Michael R. Strain, Director of Economic Policy Studies at the American Enterprise Institute, is the author, most recently, of The American Dream Is Not Dead: (But Populism Could Kill It) (Templeton Press, 2020).