Source: Jinshi Data

As is well known, the elected president of the USA, Trump, and the chairman of the Federal Reserve, Powell, have had conflicts before, and this may happen again in 2025, with their collision possibly unfolding in various ways.

If Trump's economic policies lead to heightened inflation, the Federal Reserve may be forced to "hit the brakes" and withdraw any anticipated rate cuts. The new government may voice some new opinions regarding limiting the independence of the Federal Reserve. Alternatively, "Cost-Cutting Minister" Musk may seek to completely reform the Federal Reserve's workforce, as he recently criticized the central bank for being "overstaffed."

For most of 2024, the relationship between Trump and Powell remained tense. Trump frequently criticized Powell during the campaign, suggesting that the president should "have a say" in Federal Reserve decisions, and that Powell "made many mistakes."

After Trump won re-election in November, Powell himself actively rejected the possibility of resigning before the end of his term in May 2026.

On November 7, when a reporter asked how he viewed any legal authority Trump might have to fire or demote Federal Reserve officials, the Federal Reserve chairman stated, "The law does not allow it."

And in another press conference, when asked if he would leave, he replied "no," sounding somewhat uneasy.

As Trump's inauguration approaches, he and Powell seem to be trying to make themselves sound amicable.

The president-elect stated earlier this month on NBC's Meet the Press that he has no plans to dismiss Powell before his term ends in May 2026.

Just a few days ago, Powell stated that he wishes to establish a good relationship with the White House under Trump's leadership and his nominated Treasury Secretary candidate Scott Bessent, who earlier this year in an interview suggested that Trump could appoint a 'shadow chair' to undermine Powell's influence.

Dismissing Powell.

Whether the improvement in the relationship between Trump and Powell can last remains an open question, especially in light of the Federal Reserve's decision that it must start raising interest rates again.

This month, Powell and his colleagues indicated that they expect inflation rates to be higher than previously anticipated, projecting it will reach 2.5% by the end of 2025, rather than the previously forecasted 2.2%. This revision led the Federal Reserve to cut its expected rate cuts for next year from four to two.

If the policies proposed by Trump, from tariffs to tax cuts, lead to increased inflation, this could force the Federal Reserve to further reduce any easing policies and even consider raising rates.

This may not please Trump. During his first term, Trump frequently attacked Powell (even though it was Trump who appointed him to his current position), claiming that he was not cutting rates enough and even suggesting at one point the implementation of negative interest rates.

Trump spoke openly about firing Powell, and during a press conference in 2020, he candidly stated, "I have the right to dismiss him."

The then-president also suggested the idea of demoting Powell and appointing another Federal Reserve board member as chairman.

Powell acknowledged this month that he had a public confrontation with Trump and stated that these remarks were consistent with private discussions.

"What the president says to me privately is the same as what he says publicly," Powell said on December 4.

However, Powell stated that he is "not concerned" that the Federal Reserve will lose its independence during Trump's second term.

Powell believes that the Federal Reserve was created by Congress and is independent, thus it can make decisions in the interest of the American people rather than for a specific political party. He said that both Republicans and Democrats "broadly support" this concept.

Cutting jobs at the Federal Reserve?

Even if Trump does not try to dismiss Powell, the latter's relationship with the White House could still be tested in other ways, one possibility involving the staffing of the Federal Reserve.

This action may be led by Musk and entrepreneur Vivek Ramaswamy, who will head the Department of Government Efficiency (DOGE) and are expected to propose comprehensive cuts in government spending to create a more efficient government.

Musk hinted that some of the layoffs could involve the Federal Reserve. He recently stated on X that the Federal Reserve is "ridiculously overstaffed."

Last year, the Board of Governors of the Federal Reserve located in Washington and its 12 regional Federal Reserve Banks employed about 0.024 million staff.

The vast majority (over 86%) of the employees work at regional Federal Reserve Banks and branches across the country. The Federal Reserve Board located in Washington, D.C. employs about 3,000 staff.

Unlike most federal government agencies, the Federal Reserve does not receive funding through taxpayer or congressional appropriations. The central bank funds its own Operation, primarily from interest on government securities obtained through open market operations.

The Federal Reserve's net Operation expenditures budget for 2024 is $7.1 billion, about 0.1% of the federal budget.

The Federal Reserve's income usually covers its expenditures and excess earnings are remitted to the U.S. Treasury. From 2012 to 2021, the Federal Reserve transferred nearly $1 trillion to the Treasury.

House Financial Services Committee's top Democrat, Maxine Waters (D-CA), stated that Musk is using the Federal Reserve as a scapegoat to "divert blame from the catastrophic economic policies of the new government."

Watters said, "His claim of oversupply of Federal Reserve personnel is not surprising, as he actually wants to end the Federal Reserve by showcasing in 2025 and bring the USA economy back to the 19th century."

Powell himself also stated that the Federal Reserve can avoid being affected by DOGE spending cuts, noting that the Federal Reserve is "self-funded" and has "strong legal independence."

Too many unknowns.

The incoming Trump administration's policies may bring more uncertainty to Federal Reserve officials and disrupt next year's interest rate path. Trump recently announced that he would impose a 10% tariff on goods imported from China and a 25% tariff on imports from Mexico and Canada.

EY chief economist Gregory Daco predicts that significantly raising tariffs will lead to an economic slowdown, intensified inflation, resulting in stagflation, and will also trigger turmoil in financial markets.

Daco estimates that imposing a 25% tariff on Mexico and Canada, along with a 10% tariff on China, will result in a 1.5% decline in USA GDP by 2025, while increasing the inflation rate by 0.4%.

However, not all Federal Reserve observers expect inflation to worsen.

Former St. Louis Fed president Bullard, who served during Trump's first term, stated that he believes tariffs will not have a significant impact on inflation, as they may harm growth.

I believe that the damage caused by tariffs to the world economy may outweigh any price effects," he told Yahoo Finance. "So, I do not think tariffs will lead to inflation.

Brad added that when Trump imposed tariffs on China in 2018 and 2019 and threatened many other countries with tariffs during his first term, the trade war created uncertainty globally, leading companies to scale back investments.

Wilmington Trust Chief Economist Luke Tilley agreed with Brad's view, stating that he believes the pressures facing economic growth are greater than those of inflation.

He said that if high tariffs lead to significant retaliation, the USA is likely to enter a recession. Then, the Federal Reserve will lower interest rates after 12 months.

Tilley stated, "The higher the tariffs, the more retaliation there will be, and the greater the likelihood of an economic recession in the USA, which actually means that inflation and interest rates will decrease in the long run.

Powell stated in December that the Federal Reserve still faces too many unknowns, making it impossible to determine how tariffs will affect interest rate settings. However, he did mention that some Federal Reserve officials have begun to incorporate the policies proposed by Trump into their policy forecasts.

Powell said in New York in December, "We have no idea how high the tariffs will be, when they will be imposed, for how long, which commodities will be subject to tariffs, and which countries' goods will be taxed, and how this will affect prices.

编辑/jayden