Bloomberg News
Try as they might, President Donald Trump and his allies have not been able to harangue the Federal Reserve into lowering interest rates. But that doesn’t mean their rhetoric isn’t getting results.
Trump’s desire for lower rates — and a more compliant central bank — have sent a clear signal to the financial sector and economic actors more broadly that more accommodative Fed policy is coming, one way or another.
“The market is thinking that, if Trump gets his way, then even if [Fed Chair Jerome] Powell holds through the end of this year or cuts rates slowly, by the end of next year, the picture is going to look a lot different, because Trump wants rate cuts come hell or high water,” said Derek Tang, CEO and co-founder of the Washington-based research firm Monetary Policy Analytics.
Trump is no novice when it comes to decrying the central bank, having done so multiple times through his first presidential term and repeatedly through his most recent electoral campaign. Now, his appointees and some members of Congress are joining him in scrutinizing Powell.
During a pair of appearances on Capitol Hill last week, Powell faced lawmaker questions about whether the Fed’s reluctance to cut rates was a symptom of his own political leanings. Some also grilled him on cost overruns related to the Fed’s ongoing building renovations in Washington.
On Wednesday, Federal Housing Finance Agency Director Bill Pulte, the administration’s leading Fed attack dog and rate cut advocate, called for a congressional investigation into Powell for what he deemed “deceptive” responses to Senate Banking Committee questions about the renovation project.
“I am asking Congress to investigate Chairman Jerome Powell, his political bias, and his deceptive Senate testimony, which is enough to be removed ‘for cause,'” Pulte said in a written statement, adding that Powell’s responses under oath amounted to “nothing short of malfeasance and is worthy of ‘for cause.'”
By invoking removal, Pulte’s statement alludes to another tool in Trump’s Fed-pressure utility belt: the threat — real or implied — of termination. The president has stated that he is not seeking to remove Powell from office and the Fed chair has said he is in no danger of being ousted. Even so, the administration’s track record of breaking from institutional norms leaves the possibility squarely on the table.
Thus far, Trump’s pressure campaign has not swayed policymakers at the Fed. Last month, the Federal Open Market Committee held interest rates unchanged for the fourth consecutive meeting, with Powell attributing uncertainty about the potential inflationary impacts of new tariff policies as a driving factor in the committee’s May and June decisions.
Powell has maintained that he is comfortable holding rates where they are until the committee is confident tariffs will not reignite inflation, or data shows a steep drop-off in economic activity or employment. He has also been adamant that political commentary, even from the president, plays no role in the Fed’s decision-making.
“The things that matter are using our tools to achieve the goals that Congress has given us, maximum employment, price stability, financial stability,” Powell said during a public speaking engagement this week. “That’s what we focus on 100%.”
Yet, recent weeks have seen rate cut expectations increase, especially looking into next year, according to the CME Group’s Fed Track tool, which policy outcome probabilities based on 30-day Fed futures contracts. As of Wednesday, nearly three-quarters of market participants expect a full percentage point of reduction by next year’s June FOMC meeting, compared to less than half on June 18. Likewise, 44% of the market expects five or more rate cuts within the next year, more than double the amount that did two weeks ago.
Yields on 10-year Treasury notes have also been trending down. After surging to more than 4.5% in May — as bond investors demanded a higher premium for long-dated government debt — yields have come down to about 4.25%. Michael Redmond, a U.S. policy economist for Medley Global Advisors, said this level of interest rates signals that markets are not being spooked by the president’s jawboning against the Fed.
“That’s a little bit surprising, given how aggressive the President’s rhetoric has been and what seems to be a game plan that they’re laying out for … selecting somebody for the opening board seat in January,” Redmond said, referring to Fed Gov. Adriana Kugler’s term, which expires next year.
Redmond said the dynamic behavior either indicates that the investors and traders agree with Trump’s view of where policy should go, or they are confident that the other members of the FOMC will be able to keep the president’s next appointee — who could well take over as Fed chair when Powell’s term expires next summer — sufficiently in check.
“It’s not possible for Trump to get the majority of FOMC voters in essentially one term,” he said. “So there are safeguards on how much interest rates can be lowered.”
But Trump is not starting from scratch in his effort to assemble a more sympathetic FOMC. Two committee members, Fed Gov. Christopher Waller and Vice Chair for Supervision Michelle Bowman — both of whom were appointed during Trump’s first stint in the White House — have stated their preference to cut rates as soon as this month.
Tang said the supportive statements from Waller and Bowman have set Trump’s latest bout of Fed bashing apart from previous episodes. The president also has economic data on his side. Unemployment has remained near historic lows and inflation is trending toward the Fed’s 2% target. Even Powell acknowledged on Tuesday that the Fed likely would have cut rates already this year were it not for trade policy uncertainty.
“It does seem like market expectations for next year have moved lower,” Tang said. “That might have to do with the data, it might have to do with the fact that the committee — Waller, Bowman and maybe a few others — are turning towards the labor market mandate more, and also to do with Trump’s comment. It’s a combination.”
Yet, while the Fed voices calling for rate cuts have grown louder in recent weeks, there is a stark divide forming within the FOMC. While most participants favor lowering rates at some point this year, a growing number — seven out of 19 — called for no change to the federal funds rate this year, according to the committee’s latest quarterly summary of economic projections.
Based on this, Redmond said it is unlikely that Trump gets the full two-percentage-point lowering of the federal funds rate that he’s been calling for. But, Redmond noted, if tariff-induced inflation does not materialize soon, the cut-averse hawks on the FOMC might be outmaneuvered by their more dovish counterparts.
“The pressure is building on the Fed to prove that there’s going to be some inflationary problems from tariffs, and, if not, to start moving with trade cuts relatively soon,” he said.
