Inside the halls of the Federal Reserve’s headquarters overlooking Constitution Avenue in Washington D.C., casual mentions of the incoming Trump administration are cautious and infrequent. That’s by design.
Donald J. Trump had a fraught relationship with the politically independent Fed during his first term. The president wanted central bankers to lower interest rates more aggressively and faster than they thought was economically appropriate. When officials refused to comply, he blasted them as “boneheads” and an “enemy.” He flirted with trying to fire Jerome H. Powell, the Fed chair. He tried (and failed) to appoint loyalists to central bank leadership roles.
As the Fed enters a new Trump era with interest rates higher than they were at any point in his first term, tensions seem poised to escalate once again — and America’s central bank is on high alert.
Fed analysts try to avoid casually discussing tariffs in email or Microsoft Teams meetings, wary that the information could become public and make the Fed look anti-Trump, according to one staff economist who spoke on the condition of anonymity to discuss the sensitive matter. Hallway chatter has taken a negative tone but is often studiously generic and apolitical, according to people familiar with the mood inside the building who also requested anonymity. And while Fed officials and economists have had to begin to consider what Mr. Trump’s promised policies might do to growth and inflation, they have avoided publicly speculating.
Central bankers are, in effect, keeping their heads down to stay out of the limelight. But try as they might, they appear destined for another crash course with Mr. Trump.
The president-elect promised “interest rates cuts the likes of which you have never seen before” while campaigning. Fed officials have been cutting rates since September and are on course to lower them further as inflation cools, but they are unlikely to reduce them as much as Mr. Trump is hoping.
A combination of strong growth, a resilient labor market and somewhat stubborn price increases could add up to slower Fed rate cuts in 2025 than central bankers themselves expected as recently as September. Mr. Trump’s policies could further delay rate reductions if they seem likely to stoke higher inflation.
And even in a best-case scenario, few if any economists think that Mr. Powell’s Fed will return its policy rate to the near-zero level that prevailed in 2020 — the setting that was the backdrop for the record-low mortgage rates that Mr. Trump has been promising to bring back.
In fact, the groundwork for the Trump-Fed collision could be laid as early as this week. Fed officials are poised to cut rates in December while releasing their first set of economic forecasts since the election. Those forecasts are widely expected to show a shallower path of rate cuts in 2025 than central bankers had previously anticipated.
“The outlook for interest rates should be friendly,” said Joseph LaVorgna, who is chief economist for SMBC Nikko Securities America and was a White House economist during the first Trump administration. He said he was worried that the Fed would cut rates less in 2025 if the president-elect’s plan to extend the 2017 tax cuts and to lower regulations on oil and other industries pave the way for hotter economic growth.
“My biggest concern is that the Fed focuses way too much energy on thinking inflation is driven by demand,” he said.
It is hard to know exactly how Mr. Trump would react to slower rate cuts. Some economists have speculated that as long as rates are coming down, he may not fuss about how much or how quickly. But during his first administration, Mr. Trump complained about the Fed even when it was cutting interest rates in late 2019.
“Would be sooo great if the Fed would further lower interest rates,” Mr. Trump posted on X that December. At another point, he posted that the central bank should get “rates down to ZERO, or less.”
Given that, many analysts think that Mr. Trump could react strongly if the Fed slows down on rate cuts next year — which seems likely.
The Fed raised rates sharply in 2022 and 2023 in a bid to slow the economy and wrestle rapid inflation under control, but officials began cutting borrowing costs since September of this year in response to cooling inflation and a slowing job market. Rates now stand at about 4.6 percent.
But while officials previously expected to lower interest rates to 3.4 percent by the end of 2025, recent economic developments have caused economists and investors to think that they may not get them down quite that much.
Growth has been faster than expected and the job market seems to have stabilized since September. There is a risk that lowering rates too much too quickly could stoke the economy in a way that allows inflation to get stuck at a slightly elevated level.
“Growth is definitely stronger than we thought, and inflation is coming a little higher,” Mr. Powell said at The New York Times’s DealBook Summit this month. “The good news is that we can afford to be a little more cautious as we try to find neutral.”
In fact, Mr. Trump’s own policies could make it tough for the Fed to lower rates sharply. The president-elect has promised to increase tariffs on U.S. trading partners and deport immigrants, policies that have the potential to push up prices.
It is obvious why a slow and shallow series of Fed rate cuts could irk the incoming president: If rates stay high for longer, consumers and businesses are likely to chafe at pricey borrowing costs, which will make it more expensive to finance a home purchase or a corporate expansion.
But it is less clear what Mr. Trump might do about it.
At least initially, Mr. Trump cannot shake up the Fed’s leadership. President Biden reappointed Mr. Powell as chair, and his current four-year term does not expire until mid-2026.
Firing Mr. Powell also looks unlikely. Mr. Powell has been clear that he does not believe the White House has the legal authority to remove him, and that he would not step down if asked. And Mr. Trump has said that he does not have plans to try to oust the Fed chair this time around.
“No, I don’t think so. I don’t see it,” Trump said when asked if he would remove Mr. Powell in an NBC interview that aired on Dec. 8.
But even if the president stops short of trying to remove Mr. Powell, he will be able to replace the Fed chair eventually. And there are things he can do to make the Fed chair’s job more difficult in the interim. Chief among those, the president seems primed to once again rail against the Fed in public.
Criticism would not force the central bank to change course: The Fed sets policy independently of the White House, and its officials have proved their willingness to resist Mr. Trump in the past. But it could slowly chip away at the Fed’s favorability among voters and the lawmakers who represent them.
Over time, that could matter. Fed officials are insulated from the White House, but the institution does answer to Congress, which can amend the law that gives central bankers their power.
The administration could also get more creative than just using the bully pulpit. Mr. Trump’s pick for Treasury Secretary, the financier Scott Bessent, at one point during the campaign floated the idea that the president-elect could make it clear well in advance whom he planned to tap as Mr. Powell’s eventual replacement.
Doing so would create a “shadow” Fed chair, the logic went. Because a wide variety of borrowing costs respond more to expectations about future Fed policy than to the moves themselves, a new pick for chair could lower real-world interest rates through commentary alone.
That suggestion was not endorsed by Mr. Trump. But it underscored that the road ahead could be a treacherous one for America’s central bank.
“There is always some risk that at the point the Fed decides to slow or stop, that generates some friction with the incoming administration,” said Krishna Guha, a vice chairman at the research firm Evercore ISI.
For the Fed, he said, the best way to proceed may be to pursue a policy that is justified in the economic data — while ignoring any background noise in Washington.
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