The US Federal Reserve’s Trump problem

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Last week was a particularly testing one for Jay Powell. Donald Trump resumed his criticism of the US Federal Reserve chair for not cutting interest rates faster by describing him as a “stupid person”. On Wednesday, US media reported that the president might nominate a new chair well before Powell’s term expires in May 2026. The White House later said no announcements were “imminent”, helping to quash a sell-off in the dollar. The rumours around his job rounded off a week that had started with other members of the Fed’s rate-setting committee pushing for cuts too.

If Trump wants rate cuts, his interventions and chaotic policy agenda are not helping his cause. For starters, should the president reveal his successor to Powell well before his term elapses, then it raises the worrying prospect of a “shadow Fed chair” who could signal a more dovish direction on rates from the sidelines. That would stoke confusion in markets, and distort the transmission of monetary policy. Right now it is also driving speculation of a loosening in the future policy stance. As recent market moves have shown, that weakens the dollar and boosts the case for higher rates at the margin.

Then there is the immediate uncertainty around the president’s tariff policies. At its meeting in mid-June, the Fed held rates at 4.25 to 4.5 per cent. But its policymakers were split on where they should go next. Recently two rate-setters — including Christopher Waller, a leading candidate to succeed Powell — said that the Fed ought to consider cuts as soon as next month. After all, there has been only a slight uptick in US inflation readings since the president’s April 2 tariff announcements. High rates are constraining growth. Credit card delinquencies are at their highest in over a decade and annual wage growth on job postings are at their joint lowest in four years.

But Powell’s caution is sensible. Data on Friday showed that in May annual growth in the core personal consumption expenditures index — the Fed’s preferred measure of inflation — rose to 2.7 per cent. Indeed, it is too early to judge the effects of tariffs on inflation. First, US businesses are still working through imported stockpiles. Price pressures from existing tariffs may not show up in the inflation numbers until the summer months. The Fed would then be in a better position to understand how higher duties are passing through supply chains.

Second, Trump’s full tariff package hasn’t even hit yet. It is unclear what duties will prevail beyond July 9, when the president’s deadline for trade partners to renegotiate his “liberation day” tariffs expires. When those levies take effect, they will push up prices further. The administration is also mulling additional sector-based tariffs. Other price pressures may build too. Global oil prices remain exposed to the fragile ceasefire between Israel and Iran. Trump’s tax-cutting “big beautiful bill” could add further price pressure.

If tariffs, the pass-through to consumers, and broader price shocks surprise to the upside then there is a risk of a sustained rise in inflation — not just a one-off jump in the price level. After all, Americans have experienced above-target price growth for over 4 years, and year-ahead Inflation expectations remain elevated. But if the implementation of tariffs are delayed and uncertainty lingers, then demand may drop faster and thereby raise the case for cuts.

For now, keeping rates on hold feels like the safest option given all the uncertainty. But that means the risk of a policy mistake is high. If the central bank had more clarity on the extent and timing of tariffs — and the president’s broader agenda — it would be in a far better position to ascertain the risk of cutting rates sooner. The president will do well to realise that the dilemma the Fed faces is largely one of his own making.