The longstanding tensions between President-elect Donald Trump and Federal Reserve Chair Jay Powell are expected to take center stage again in 2025, with economic policies and institutional dynamics setting the stage for potential clashes. 

Donald Trump, reelected in November 2024, frequently criticizes Powell. This raises questions about how the relationship between the White House and the Federal Reserve might evolve in the coming year.

Throughout 2024, Trump publicly attacked Powell’s leadership, arguing that the president should have greater influence over Federal Reserve decisions. On the campaign trail, Trump claimed Powell had “gotten it wrong a lot” and suggested that his administration could reexamine the Fed’s independence. 

Federal Reserve spending under a ‘microscope’

After Trump’s reelection, Powell forcefully dismissed rumors of being removed from his position, emphasizing his intent to serve out his term, which expires in May 2026. However, even if Powell retains his position, analysts expect renewed friction between the administration and the Fed.

The President-elect has appointed billionaire entrepreneur Elon Musk and businessman Vivek Ramaswamy to head the Department of Government Efficiency (D.O.GE). The duo has pledged to overhaul federal spending, and their plans could include significant changes at the Federal Reserve. 

Musk recently called the Fed “absurdly overstaffed” on his social media platform X, hinting at potential workforce reductions.

The Fed is absurdly overstaffed

— Kekius Maximus (@elonmusk) December 23, 2024

According to a report from Yahoo Finance, the Federal Reserve employs approximately 24,000 individuals across the United States, with 86% of its workforce stationed in regional reserve banks. 

The headquarters in Washington, D.C., houses about 3,000 employees. Unlike most federal agencies, the Fed operates independently of taxpayer funding, financing itself through revenue generated by government securities.

Despite its independence, critics do not see the Fed’s operational expenses as insignificant. In 2024, its net operating expenses were budgeted at $7.1 billion, roughly 0.1% of the federal government’s total budget. Historically, the Fed has sent excess revenue to the U.S. Treasury, transferring nearly $1 trillion between 2012 and 2021.

Trump’s economic policies clash with the Fed’s plan

Trump recently announced plans to impose steep tariffs: 10% on imports from China and 25% on goods from Mexico and Canada. These measures, aimed at boosting domestic manufacturing, are projected to have significant economic repercussions.

EY Chief Economist Gregory Daco warned that the tariffs could lead to stagflation, marked by slower economic growth and higher inflation. He estimates that the tariffs would reduce US GDP by 1.5% in 2025 while increasing inflation by 0.4%. Financial market volatility could also follow, adding pressure to an economy already grappling with persistent inflation.

However, not all experts share Daco’s concerns about inflation. Former St. Louis Fed President Jim Bullard, who served during Trump’s first term, argued that the growth-reducing effects of tariffs might offset any inflationary impacts. 

“The detriment to the world economy would outweigh any price effects,” Bullard noted, casting doubt on the notion that tariffs alone would drive inflation higher.

Interest rates in question, again

The Federal Reserve’s December 2024 meeting forecasts suggested a cautious path for interest rates. Markets anticipated that the federal funds rate would drop slightly to 3.9% by December 2025, compared to the current target range of 4.25-4.5%. 

However, these projections look rather too optimistic given the potential inflationary pressures from Trump’s economic agenda, including tax cuts, tariffs, and immigration policies.

Financial analysts from the Financial Times noted that the Fed’s cautious stance could diverge from the more aggressive rate-cutting strategies of the European Central Bank (ECB) and the Bank of England, further complicating the global economic landscape.

Trump’s economic policies, combined with Musk and Ramaswamy’s cost-cutting initiatives, may pose significant challenges for the Federal Reserve. While the Fed has historically operated with substantial independence, tensions with the White House could test that autonomy.

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