"New Federal Reserve News Agency": Trump is expected to continue pressuring the Federal Reserve, putting Powell in a lose-lose situation

Renowned financial journalist Nick Timiraos, known as the "New Federal Reserve Correspondent," wrote that Trump has escalated his long-standing public attacks on the Federal Reserve, putting the Fed in a lose-lose situation as it grapples with rising prices due to tariffs and the risks of slowing economic growth.

Last Friday, Trump urged Powell to lower the current policy interest rate of about 4.3% to between 1% and 2% to reduce the interest costs associated with the rising federal debt.

Since his private meeting with Powell in the Oval Office last month, Trump has launched a fierce attack. "I don't understand why the board doesn't overturn this 'complete idiot'!" He even reiterated his consideration of firing Powell, although he had previously floated this idea and abandoned it.

Other advisors to Trump, including U.S. Secretary of Commerce Lutnick, have amplified his criticisms of monetary policy, claiming that concerns about tariffs driving inflation are exaggerated.

Powell, however, insists that the Federal Reserve makes decisions based on the best analysis of the economy. He stated last week, "For me, it's not complicated. All Federal Reserve members want a robust U.S. economy."

Timiraos pointed out, this kind of attack is almost unprecedented in modern history, forcing the Federal Reserve into a terrible choice: either significantly cut interest rates as Trump demands, risking exacerbating inflation and damaging its credibility in the market; or maintain its current wait-and-see stance, facing further humiliation and undermining the Fed's position if the economy slows significantly and the White House's assessment that inflation is not a concern proves correct.

Powell will attend a congressional hearing on Tuesday to provide regular testimony on monetary policy. His performance in Congress will be a key indicator of the support for the Fed's independence. In recent years, the Federal Reserve has maintained a degree of independence in setting monetary policy to avoid direct political interference, and Powell has made unremitting efforts to defend this independence.

Timiraos noted that the stakes are not just about the current policy debate. Powell has less than a year left in his term. Trump is setting a template for presidential influence over the Federal Reserve, and his ongoing criticism serves as a warning to Powell's successor while also selecting potential candidates willing to appease Trump. If future Federal Reserve leaders are more inclined to consider political preferences rather than economic data in policymaking, the decades-long credibility of U.S. monetary policy could be eroded.

Divisions Within the Federal Reserve

At this time, divisions among policymakers within the Federal Reserve have also emerged, which will further complicate Chairman Powell's efforts to balance political and economic risks in the coming months.

Since last week's June FOMC meeting, the first officials to hint at supporting a rate cut at the July meeting were two officials nominated during Trump's first term, Bowman and Waller:

Federal Reserve Vice Chair for Bank Supervision Bowman stated on Monday that she is more concerned about the risks of weak employment than high inflation. It is noteworthy that Bowman had previously been highly focused on inflation issues. Her remarks represent a significant shift

Federal Reserve Governor Waller stated in an interview with CNBC last Friday that he might support a rate cut next month due to concerns about an excessively weak labor market.

In the past two months, one of the popular candidates for the next Federal Reserve Chair, former Fed Governor Warsh, has made several speeches, stating that the Fed must take responsibility for these attacks. "I see the media excitedly reporting how politicians are relentless towards the Fed, and I just want to say: Grow up! Be tough."

Pressure from the President on the Fed Chair is Not New

Pressure from the President on the Fed Chair is not new, but it has usually been done privately in the past. In the 1960s, former President Johnson summoned then-Fed Chair William McChesney Martin Jr. to his Texas farm, where he used body language to intimidate him on the balcony; the two later downplayed the conflict publicly.

In the 1970s, former President Nixon and his advisors even spread false information, claiming that then-Fed Chair Burns advocated for wage and price controls while seeking a pay raise for himself. Ultimately, Burns succumbed to pressure from the White House. The consequences of high inflation in the 1970s were only curbed after a punishing recession in the early 1980s. Since then, central banks in the U.S. and other developed countries have worked to gain more government support for their independence, arguing that this leads to better economic outcomes.

Powell was appointed as Fed Chair by Trump in 2018, after Trump had repeatedly criticized him for acting too slowly and failing to cut rates in a timely manner to support the economy.

However, Trump's criticisms over the past week have been different. Congressional Republicans and the White House have found that cutting spending and reducing the deficit is much more difficult than expected, leading Trump to call for lower interest rates to alleviate federal debt interest expenses that may exceed the defense budget this year.

Concerns about the Fed yielding to so-called "fiscal dominance" are at the core of the background in the 1950s when the Fed sought greater autonomy from the executive branch, or what is known as independence.

Timiraos quoted investment manager Mark Spindel, who wrote a book on the history of Fed independence:

It is common for the President to pressure the Fed Chair, but Trump's approach is different. His attacks are more vicious, more sustained, and more public.

Trump's bombardment is effective. He does it because it works.

Dilemma

Timiraos stated, if aggressive rate cuts are made without clear signs of economic weakness, it could backfire, as long-term rates may rise. The Fed controls short-term rates, but long-term rates are determined by market demand for U.S. Treasury bonds.

Trump also acknowledged last Friday, "My strong criticism of Powell has indeed made it harder for him to do what he needs to do."

Fed officials are uneasy about these attacks. If the public no longer believes that the Fed acts in the national interest, it becomes more difficult for the institution to make the tough decisions necessary to slow the economy to control inflation when needed.

Trump's increasingly sharp attacks on Powell reflect that the President has no better way to force monetary policy to tilt in his favor, aside from presenting more compelling arguments about economic risks Timiraos pointed out that removing Powell now seems less realistic than it did a few weeks ago. The Supreme Court last month, in approving Trump's emergency request to remove a federal commissioner, deliberately stated that the Federal Reserve is not subject to arbitrary removal.

Trump's second option is to announce his successor for Powell in advance—Trump hinted at the beginning of this month that he might do so. The so-called "shadow chairman" approach aims to undermine Powell's influence, making the market less attentive to his statements regarding policy prospects.

However, this would put the "successor" in an awkward position—either publicly criticize a future colleague (whom they will need support from once in office) or risk angering Trump by defending current policies, potentially losing the position even before taking office.

Trump's lack of a good way to remove Powell is why he is more likely to choose to continue applying pressure. The Federal Reserve is concerned about inflation spiraling out of control again within five years, but Trump sends a signal to officials at the cost of this systemic risk: if there is an economic recession, the responsibility lies with you