After Donald Trump’s election, what changes will occur in the Federal Reserve’s interest rate policy? Will the Fed itself undergo any changes? This is a critical issue that directly affects interest rates, costs, and trade in both imports and exports. In addition, this has significant implications for Chinese companies expanding overseas, as well as China’s international investments, among others. Many such issues might arise in the future, and once they actually happen, things will seem to make sense when examined in hindsight. However, this retrospective analysis often fails to see the whole spectrum of reality. The key to this, in fact, lies in understanding the evolving logic in advance. This process is similar to what artists do during the composition stage of a painting; once involved, they already have a certain degree of control over the final outcome. Therefore, studying the long-term interest rate trends of the Fed is highly crucial.
After Trump’s election, the Fed itself is quite nervous, contrary to the calm appearance they are trying to project. On November 7, the Fed held an interest rate decision press conference. Although the decision statement consistently focused on macroeconomic issues such as “inflation” and “employment”, just as the U.S. presidential election had just concluded, “Trump” became an unavoidable topic in the conference.
Given Trump's frequent dissatisfaction with the Fed’s decisions leading up to the election, even threatening at one point to fire Fed Chairman Jerome Powell, there was significant attention on the contentious relationship between the two during this press conference.
When asked whether he would resign if President Trump asked him to step down, Powell simply answered “No". The journalist pressed further, asking if Powell believed, from a legal perspective, that he was required to leave. Powell again answered succinctly a "no". The journalist, not letting up, inquired whether Powell thought the President had the authority to fire or demote him. Powell responded that it is “not permitted under the law”. Finally, when asked if Powell was concerned about the impact of Trump’s influence on the Fed's independence, Powell replied, " I’m not going to get into any of the political things here today. But thank you". This exchange is what many news reports referred to as "Powell’s refusal to resign".
Powell was, as a matter of fact, originally appointed by Trump. However, over time, Trump became dissatisfied with Powell, believing that after being appointed, he was not sufficiently compliant, particularly on issues related to monetary policy. Trump even criticized Powell on Twitter, now known as X, calling him " no ‘guts’, no sense, no vision! A terrible communicator!" The U.S. President does not have the legal authority to control the Fed’s policy decisions, and Trump's power is limited to making the appointment, and the Fed operates independently. That said, as President, Trump could still find ways to influence Powell or exert pressure to achieve his objectives. The core issue, however, lies in Trump’s broader vision for macroeconomic policy and the policy recommendations from his team, rather than the Fed or Powell personally. One challenge for Trump is that any economic plans or political commitments he wishes to pursue will still be closely tied to the Federal Reserve's monetary policies.
This makes the "Trump-Powell" issue a focal point.
When considering Trump's macroeconomic policies within the context of the monetary policy framework, what options are available to him? The choices are limited to three primary alternatives: raising interest rates, lowering interest rates, or maintaining relative stability. Trump must select one of these three options in order to align monetary policy with his political agenda, particularly his campaign promise to "Make America Great Again."
In the election, inflation became a highly charged issue. In fact, the Democratic campaign of Biden-Harris ultimately faltered due to the inflation issue. While this concern was widely anticipated, the Fed, the Biden administration, and economists like Paul Krugman from the Democratic camp downplayed the issue, attempting to soften its political impact. However, the end result was still a "sea of red" across much of the country. The so-called "scientific nature of the data”, such as the year-over-year decline in inflation, ultimately could not override the lived experiences of the average American public.
Hence, controlling inflation became Trump's primary policy objective, a goal he has explicitly stated. The dilemma, however, is that to curb inflation through interest rate hikes, the Fed would have to suppress inflation at the cost of economic contraction. While inflation might decrease, economic growth would slow, job opportunities would diminish, and unemployment would likely rise, though theoretically, the dollar could strengthen.
Alternatively, maintaining interest rates at current levels is also an option, but it carries high political costs. This approach could be seen as inaction, providing an excellent attack point for the Democratic Party. What then, will the Fed and Trump choose? I believe that Trump has little choice but to pursue aggressive rate cuts. This is because lowering interest rates would reduce the costs of buying cars and homes, thereby stimulating economic activity. With more job opportunities, a lower unemployment rate, and higher incomes, the economy would heat up. Theoretically, this would weaken the dollar, though the actual impact would depend on other factors such as tariffs, GDP growth, and other policy measures. Inflation might rise as well, but the increase in personal incomes could offset the negative effects of higher inflation, making the public more willing to accept it. Ultimately, this approach might mitigate the damage done by less-than-ideal inflation figures.
Therefore, Trump's policy choice is quite likely to be a demand for the Fed to continuously cut interest rates. How far will the rate cuts go during Trump's four-year term? My estimation is that the federal funds rate will likely be reduced to a policy rate of around 2% to 2.5% over the course of the next four years. This rate level would already account for the financial system's need to recover from the pandemic. Without this consideration, rates could even be reduced further. Before the pandemic, the U.S. commercial interest rate was around 1.75%, and it remained at that level for a long period, so this could serve as a reference point. Based on this assessment, the Fed would need to reduce the federal funds rate from its current level of 4.50% by approximately one-quarter point at a time, making a total of 10 rate cuts—or even more—over the next four years.
The Fed has often been thought of as being haughty. Is such a long-term forecast realistic?
There are some indicators to consider. During his campaign, Trump repeatedly promised to alleviate the burden of high interest rates on consumers. While most financial experts believe that achieving this goal as U.S. president would likely be a slow process, largely beyond his control, some, like Ralph McLaughlin, Senior Economist at Realtor, argue that although interest rates are high, the idea that the president can directly influence the Fed’s policy is somewhat unrealistic. He suggests that broader policies or expectations of policy would have a more immediate effect. In simpler terms, his point is that expecting rate cuts is not a realistic approach.
While this view is widely held, I differ in my assessment. I believe that Trump will indeed push for monetary policy measures that involve rate cuts. His bet is that the pace of cost reductions due to rate cuts will outpace the speed of rising inflation. The enthusiasm of Americans in purchasing new cars and homes, coupled with Trump’s efforts to suppress energy prices and other commodities, will contribute to a broader control of price levels.
As for the Fed's opposition and caution, it cannot afford to bear the public outcry that would follow if it were seen as harming the U.S. economy. Such a backlash would likely lead to major reforms at the Fed, with figures like Powell and those on Wall Street losing everything.
Indeed, on November 7, the Fed lowered the federal funds target range by 25 basis points to 4.50%–4.75%, marking its second rate cut this year. However, this is likely just the beginning of its rate-cutting process.
Final analysis conclusion:
The "Trump-Powell" dynamic has become a crucial issue, and their ongoing interplay in the coming years is likely to bring about sustained changes in interest rates. To fulfill his "Make America Great Again" promise, Trump is likely to exert pressure on the Fed to pursue a path of rate cuts so as to reduce borrowing costs and stimulate consumption. On November 7, the Fed lowered the target range for the federal funds rate by 25 basis points to 4.50% to 4.75%, and this is likely just the beginning of rate cuts in the U.S.
