Trump and Powell may find themselves at odds over interest rate policy.

• If inflation rises again, the Fed may raise interest rates, which could anger President-elect Trump.
• In recent days, there has been uncertainty among futures traders regarding their predictions about the Fed's next move.
• According to Joseph Brusuelas, chief economist at RSM, tensions between the White House and the Fed arise from all roads.

In 2025, President-elect Donald Trump and Federal Reserve Chair Jerome Powell may face a policy conflict due to the economic conditions.

If inflation rises again, Powell and his colleagues may raise interest rates, which could anger Trump, who criticized Fed officials for not lowering monetary policy fast enough during his first term.

"Joseph LaVorgna, former chief economist at the National Economic Council during Trump's first term, stated without hesitation that there is a possibility of conflict if the president feels that rates should be lowered and the Fed does not comply. He added that the Fed may do so for public optics, which could be problematic."

Despite being appointed Fed chair by Trump in 2018, Powell and Trump frequently disagreed on the appropriate path for interest rates.

The chair publicly and aggressively rebuked Trump for his criticism, emphasizing the importance of the Fed's independence from political pressures, including those from the president.

In January, when Trump assumes office, the two will operate in a different context. Unlike the first term, there was minimal inflation, which allowed Fed rate hikes to keep benchmark rates below their current levels.

Trump's fiscal policy during his current term is expected to be more expansionary and protectionist than before, with a focus on higher tariffs, lower taxes, and increased spending. If these policies begin to show results, the Fed may consider adopting a more stringent monetary policy to combat inflation.

SMBC Nikko Securities' chief economist, LaVorgna, believes that taking a position in the new administration would be a mistake.

"Trump is proposing a nontraditional approach to policy, but the Fed must evaluate it through a traditional economic lens," he stated. "The Fed will face a challenging decision due to their traditional approach to economic policy."

Market sees fewer rate cuts

In recent days, there has been uncertainty among futures traders regarding their predictions about the Fed's next move.

The likelihood of another interest rate cut in December has decreased from a near-certainty to a coin-flip chance, according to the CME Group's FedWatch. Additionally, the market now expects three quarter-percentage-point reductions through the end of 2025, which is a significant decrease from prior expectations.

Recent developments have caused investors to become anxious about the Fed's plans. On Wednesday, Fed Governor Michelle Bowman stated that inflation progress has slowed down, which may suggest that she will advocate for a slower pace of rate cuts.

"The Fed, Treasury, Commerce, and the White House will all be involved in tensions, according to Joseph Brusuelas, chief economist at RSM."

Trump is assembling a group of loyalists to execute his economic plan, but the success of the initiative hinges on accommodative or precise monetary policy that neither overstimulates nor restrains growth excessively. The Fed's objective is to determine the "neutral" interest rate, but for the new administration, it may signify something different.

The struggle over setting interest rates will cause political and policy tensions between the Federal Reserve and the White House, who want lower rates, according to Brusuelas.

"The inconsistency in the policy matrix arises when one imposes tariffs or mass deportations while simultaneously implementing deficit finance tax cuts, which leads to an increase in aggregate demand. This creates a crossroads that results in tensions between Trump and Powell."

Avoiding conflict

To be sure, there are some factors that could mitigate the tensions.

Powell's term as Fed chair ends in early 2026, so Trump may opt to wait until he can replace him with someone who shares his views. Additionally, there is little likelihood that the Fed will increase interest rates unless there is a significant and unexpected surge in inflation.

The effects of Trump's policies on inflation and macroeconomic growth may not be immediately visible in the data, so the Fed may not need to respond. Additionally, the potential impact of these policies may not be significant.

"Mark Zandi, the chief economist at Moody's Analytics, stated that he anticipates higher inflation and slower growth due to the negative impact of tariffs and deportations on supply. He believes that these factors hurt growth and increase inflation. Despite this, the Fed is expected to cut interest rates next year, although the pace of the cuts may be slower than initially anticipated."

If Trump doesn't reappoint Powell as Fed chair, the next person to take on the role may face more challenges in dealing with him.

"Zandi stated that it may not be an issue in 2025, but it could become one in 2026 when the rate cutting ends and the Fed may need to raise interest rates, making it an issue."