The ongoing tension between president-elect Donald Trump and Federal Reserve Chair Jay Powell is expected to remain in the spotlight in 2025, as economic policies and institutional dynamics set the stage for potential conflicts.
Donald Trump, re-elected in November 2024, frequently criticizes Powell. This raises questions about how the relationship between the White House and the Federal Reserve may evolve over the coming year.
Throughout 2024, Trump has publicly criticized Powell's leadership ability, arguing that the president should have a greater influence on the Federal Reserve's decisions. During his campaign, Trump claimed Powell had "made too many mistakes" and suggested that his administration might reconsider the Fed's independence.
The Federal Reserve's spending is under 'microscope'
After Trump’s re-election, Powell strongly dismissed rumors that he would be fired, emphasizing his intention to serve out his term, which ends in May 2026. However, even if Powell retains his position, analysts still predict new disagreements between the administration and the Fed.
The president-elect has appointed billionaire entrepreneur Elon Musk and businessman Vivek Ramaswamy to lead the Department of Government Efficiency (DOGE). This duo has committed to reforming federal spending, and their plans may include significant changes at the Federal Reserve.
Recently, Musk called the Fed "grossly overstaffed" on his social media platform X, hinting at the possibility of workforce cuts.
According to a report from Yahoo Finance, the Federal Reserve employs about 24,000 individuals across the United States, with 86% of the workforce working at regional reserve banks.
Headquartered in Washington, DC, with about 3,000 employees. Unlike most federal agencies, the Fed operates independently of taxpayer funding, self-financing through revenue from government securities.
Despite its independence, critics do not consider the Fed's operating costs to be insignificant. In 2024, the Fed's net operating costs are budgeted at $7.1 billion, accounting for about 0.1% of the total federal budget. Traditionally, the Fed has sent excess revenue to the U.S. Treasury, transferring nearly $1 trillion from 2012 to 2021.
Trump's economic policies conflict with the Fed's plans
Trump recently announced a plan to impose high tariffs: 10% on imports from China and 25% on goods from Mexico and Canada. These measures, aimed at boosting domestic production, are predicted to have significant economic impacts.
EY Chief Economist Gregory Daco warns that tariffs could lead to stagflation, characterized by slower economic growth and higher inflation. He estimates that tariffs will reduce U.S. GDP by 1.5% by 2025 while increasing inflation by 0.4%. Financial market volatility could also occur, adding further pressure to an economy already struggling with persistent inflation.
However, not all experts share Daco's concerns about inflation. Former St. Louis Fed Chair Jim Bullard, who served during Trump's first term, argues that the growth-reducing impact of tariffs could offset any inflationary effects.
Bullard notes that "The harm to the global economy will be greater than any price effects," raising doubts about the view that tariffs alone could push inflation higher.
Interest rates are once again in question
The December 2024 meeting forecast of the Federal Reserve shows a cautious path for interest rates. The market predicts that the federal funds rate will slightly decrease to 3.9% by December 2025, compared to the current target range of 4.25-4.5%.
However, these forecasts may seem overly optimistic considering the potential inflationary pressures from Trump's economic agenda, including tax cuts, tariffs, and immigration policy.
Financial analysts at the Financial Times note that the Fed's cautious stance may differ from the more aggressive rate-cutting strategies of the European Central Bank (ECB) and the Bank of England, complicating the global economic landscape.
Trump's economic policies, combined with Musk and Ramaswamy's cost-cutting initiatives, could pose significant challenges for the Federal Reserve. While the Fed has previously operated with considerable independence, tensions with the White House may test that autonomy.
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