The Federal Reserve’s expected decision on Wednesday to cut interest rates again will spark new questions about whether Powell, its chairman, is caving to intense public pressure by Trump. While Powell strongly rejects that notion, the president’s policies have clearly forced the central bank’s hand.
President Donald Trump rails against Federal Reserve Chairman Jerome Powell, claiming that “people are VERY disappointed in” the central bank leader. Trump’s reaction comes a day after the Fed’s lowered interest rates for the third time this year.
I expect the president believes his haranguing moved Powell in 2019; so will continue to beat up Powell.
I expect that Powell deeply resents the humiliation and market perception from 2019 and will become even more intransigent in 2025 as Trump becomes more insulting toward him.
Federal Reserve chairs leave a legacy that is studied for many years. Powell is in his last year as Fed chair. He has done an excellent job at reversing inflation while bringing the economy into a soft landing. There is no way that Powell would jeopardize his reputation and legacy by caving under political pressure and personal insults. The harsher the bullying the stronger Powell’s reputation will be.
Wendy
There are not enough good reasons to meaningfully drop interest rates right now. Maybe 1/4 point next month, but that isn’t particularly meaningful. The main issue is that dropping short term fed funds rates doesn’t ensure that longer term rates, like the 10-year drop. And it’s the 10-year that needs to drop, not the short-term rates, to see lower mortgage rates … to stimulate housing somewhat, and to deliver some small amount of relief to CRE loans that are either in trouble, or have had their troubles pushed into the future using various techniques.
But you can bet on one thing. If there’s any indication of recession and/or increased unemployment, the Fed will drop rates very quickly. Even between regular meetings if necessary.
Seriously NPR did a piece on the FED board a few days ago. Trump is going nowhere with the FED no matter what he tries. The makeup of the board won’t change just because Trump appoints someone he likes.
A friend with a quasi government organization was a top lawyer for them. He is now retired and called back into work with them because the younger lawyers do not know the operations in the organization.
Trump wanted to take them over to pave the way for taking over the FED. He is saying Trump is inactive in their regard. He is focused elsewhere for now.
I am in Starbucks. Just had coffee with him. He can not talk in detail about the legal issues.
I am not bothered as much by his absence. The Fed is a committee and unlike the POTUS, the Chair can’t overrule the other governors if they vote to leave rates unchanged.
Powell making Fed independence as his legacy… Powell “digging in” and delaying rate cuts as he feels compelled to show independence and avoid the appearance of caving to politics, even if the data could justify cuts.
Employment is actually weak. The quality and underlying strength of employment may not be as solid. Underemployment, hours worked, temporary jobs, and part-time for economic reasons all paint a weaker picture… The myopic focus on “initial claims” is misleading.
The historic relationship is breaking and dollar has somewhat decoupled from interest rates because foreign buyers are walking away from USD/ treasuries.
The administration, GOP congress are hoping a new fed chair will bring the rates down and the interest cost will go down automatically. The core risk is:
The Fed can lower short-term rates, but if the market believes inflation risk, fiscal instability, or supply-demand imbalances in Treasuries remain, long-term rates may stay elevated.
That signals the Fed has lost its grip on financial conditions, undermining its effectiveness
Whether it’s sanctions on Russia, pressuring the Fed, or pushing for growth-at-any-cost policies, administrations (of either party) often underestimate or disregard long-term institutional or market consequences.
It’s not his absence that concerns me. It’s his replacement.
While the Fed Chair may not have a veto power, to say he has no more influence than any other governor would be a mistake.
Don’t forget that one governor’s term ends at about the same time. So there will be two appointments in very short order next year. That could easily put some pressure on the Fed to conform to the President’s wishes.
Agreed. To your point…there’s a work-around to lowering rates. It will be exciting to see how it works out! How does the Fed lower rates, without lowering rates?
It’s been my experience that whenever capital rules and regulations are loosened, banks act super responsibly.
Yes, I am aware of the SLR change and posted about how that would release capital and further buyback. It is not clear whether the banks are going to buy additional treasuries because, while SLR creates capacity that doesn’t mean it will automatically translate to demand for treasuries.
Between stable coin and the SLR, there is additional $3 Trillion buying capacity is being created. But that may or may not have an impact on the longrates as most of that will go towards short-term bonds/ bills.
Go back to the NPR link I put up in the thread. The Chair would make very little or no difference. It is just one vote. Volcker had more say. None of the rest did.
The current administration has begun to acknowledge several deep-rooted, long-term structural challenges facing the U.S. economy:
1. Reserve Currency Pressure
As the issuer of the world’s reserve currency, the U.S. must run persistent current account deficits to meet global demand for dollars. Over time, this has allowed other countries to accumulate an estimated $62 trillion in U.S. assets—essentially, claims on future American output. With U.S. GDP at $28 trillion, this external liability has become a growing systemic risk.
2. Fiscal Recklessness Since the GFC
This imbalance isn’t solely due to reserve currency obligations or foreign actors exploiting the system (a crude, but not entirely incorrect point Trump raised). The deeper issue lies in America’s own fiscal irresponsibility—particularly since the 2008 financial crisis. The U.S. has embraced a “growth at any cost” model, fueling structural deficits without regard for long-term sustainability or resilience.
3. Industrial Erosion and National Security
Decades of offshoring have hollowed out U.S. industrial capacity. What was once framed as an economic efficiency play is now viewed as a national security liability. If the U.S. needed to rapidly produce something like 10,000 airplanes, it would likely find itself unable to deliver—lacking both the supply chain and skilled manufacturing base to scale.
4. Hyper-Financialization
The U.S. economy has evolved to prioritize financial markets over physical production. Capital allocation is increasingly directed toward financial engineering—stock buybacks, leverage, and speculative growth—rather than toward investment in infrastructure, R&D, or long-term productivity. The result: GDP growth decoupled from real wealth generation.
5. Widening Inequality
These dynamics have produced a deeply unequal economy. Asset owners saw massive gains, while real wages for working- and middle-class Americans stagnated. Economic mobility is increasingly constrained. This has created social fragmentation and political volatility.
6. These Problems Manifested as Trump
Trump’s rise is a symptom of these unresolved issues. His appeal lies not in policy sophistication, but in acknowledging realities that much of the political establishment—especially Democrats—refused to confront. Ignoring these structural challenges is a key reason Democrats lost touch with parts of the electorate.
7. Trump’s Proposed Remedies – ‘Beggar Thy Neighbor’
Trump’s approach attempts to externalize U.S. imbalances:
Reduce defense burden by pushing NATO allies to increase their military spending.
Use tariffs to force trading partners to absorb part of America’s trade deficit.
While blunt, these are at least responses to real problems, even if they risk trade wars and global fragmentation.
8. Another Potential Solution – Dollar Devaluation
A more systemic remedy would be a managed devaluation of the dollar, which could:
Reduce the real burden of dollar-denominated debt.
Tax foreign claims on the U.S., as seen in BBB proposals to withhold or tax interest earned by non-citizens (e.g., 5% on remittances).
Boost export competitiveness and incentivize domestic manufacturing.
Shift purchasing power from capital to labor, helping ease inequality.
9. Risks of Dollar Devaluation
However, this strategy comes with serious geopolitical and economic risks:
The Plaza Accord of the 1980s forced Japan to revalue the yen, which appreciated by 45% and contributed to three decades of economic stagnation. This experience ensures that China, the EU, and others will resist coordinated currency adjustment.
Inflationary pressure
While I expect dollar devaluation may happen, but my approach to deal with that is…
$62 trillion in purchases will be very profitable. That was the plan. Still is.
That is only true as long as corporate taxes are low.
Same answer raise corporate taxes for reinvestment.
Would it surprise you if I again said raise corporate taxes?
Right produce more, pay people more by reinvesting instead of paying corporate taxes to uncle Sam.
Completely true. The Democrats owned the corporate tax issue in 2024 but since have been on mute. When the country is deep in the doo doo they won’t own who ran the economy.
The rest of the stuff you added is how we are wasting four years.
Corporate taxes are not going to solve any of these problems. Even though I personally think US corporates are not paying their share of taxes, best example is Apple they have paid $178 B in taxes for the last 10 years whereas paid the shareholders over $1 T ( $735 B on buybacks, $300 B on dividends).
You are one of the sharpest guys on this board. You are completely wrong.
This is basic accounting for all IRR decisions. Pay uncle Sam or reinvest. We can create economies of scale in the US with much higher corporate taxes. This proved out in the 50s, 60s, and 70s.
As for the $62 Tr overseas that is pent up buying power. How many Mexican peso do you have? Eventually buying something from Mexico makes sense if you have any.
