Rate reduction prospects appear more uncertain as Federal Reserve leaders show strong support for Powell

Main Insights

• Multiple members of the Federal Reserve's policy-making group have openly opposed the White House's efforts to influence the Fed into lowering interest rates.

• Fed leaders broke their usual silence on political matters after the Justice Department issued a subpoena to the central bank as part of an inquiry involving Chair Jerome Powell.

• The Trump Administration's aggressive approach may have unintended consequences, potentially prompting the Fed to maintain higher interest rates for a longer period to reinforce its independence from political influence.

The Trump Administration's probe into Federal Reserve Chair Jerome Powell appears to be failing in its aim to pressure the central bank into steep interest rate cuts. This week, at least four key Fed officials publicly defended Powell and emphasized the Fed's responsibility to make decisions based on the nation's best interests, not presidential demands. As a result, market participants have reduced their expectations for imminent rate cuts.

Last week, the Justice Department under Trump subpoenaed the Fed for information related to Powell's June 2020 Senate testimony about the ongoing renovation of the Fed's headquarters. Powell has denied any wrongdoing, describing the investigation as part of Trump's ongoing campaign to pressure the Fed into making deep rate cuts that would affect borrowing costs across the economy. Trump, meanwhile, has claimed he was unaware of the investigation prior to the subpoena.

Economic Implications

The intensifying conflict between Trump and Powell adds complexity to the Federal Reserve's dual goals of controlling inflation and supporting employment, introducing new challenges to an already difficult economic landscape.

Several Fed governors and regional bank leaders have echoed Powell's stance, stressing that the central bank's independence from the White House is vital for its mission to manage inflation through monetary policy. Their unusually direct remarks highlight the seriousness of the situation, as Fed officials typically avoid engaging in political debates.

This resistance could influence future interest rate decisions. Some analysts suggest that the Fed may hesitate to lower rates in the near term if they perceive excessive political pressure from the Trump administration. By keeping rates elevated, policymakers may aim to demonstrate their commitment to fighting inflation and reassure the public of the Fed's autonomy, regardless of political interference.

"Whenever a central bank's independence is compromised, inflation tends to surge," said Austan Goolsbee, president of the Chicago Fed, in an NPR interview. "We've spent years working to bring inflation down, and undermining the Fed's independence only makes that task harder."

According to CME Group's FedWatch tool, which tracks expectations based on futures trading, traders have become less confident in the likelihood of rate cuts at the Fed's January, March, April, and June meetings compared to the previous week.

For instance, as of Thursday, there was a 78% probability that the Fed would keep rates unchanged at its March meeting, up from 58% the week before the investigation became public.

Other Fed officials, including Neel Kashkari of the Minneapolis Fed and Governor Michael S. Barr, made statements supporting Goolsbee's perspective. John C. Williams, president of the New York Fed, praised Powell's integrity in a recent speech.

On the other hand, Fed Governor Stephen Miran, speaking at an economic event in Greece, downplayed concerns about the Fed's independence, calling them "noise." Miran, appointed by Trump in the fall, is currently on leave from his role as a Trump economic advisor while serving on the Fed's policy committee.