Trump lashes out at a favorite nemesis: The Federal Reserve

“Because Jay Powell and the Fed failed to stop the problem they created with inflation, I will do it," Trump said in a post on his social-media platform on Wednesday.

Trump issued his latest statement about an hour after Powell concluded a news conference in which he signaled the Fed was comfortable with a new wait-and-see posture on interest-rate cuts. The central bank lowered its benchmark interest rate by a full percentage point at the last three meetings of 2024, after inflation slowed considerably over the past two years.

At the news conference, Powell leaned heavily on the keep-your-head-down demeanor he honed during his first rodeo with Trump seven years ago. Powell sidestepped multiple questions that could have provoked a collision with Trump.

“I’m not going to have any response or comment whatsoever to what the president said. It’s not appropriate for me to do so," Powell said Wednesday.

Powell said the Fed makes its rate decisions guided by impartial analysis of economic data. “That’s always what we’re going to do, and people should have confidence in that," he said.

Trump named Powell to lead the Fed starting in 2018 and former President Joe Biden reappointed him to a second four-year term that started in 2022.

During Trump’s first term, Powell erected guardrails to protect the Fed’s autonomy to set interest rates as it deemed fit—its so-called “independence"—by cultivating allies on Capitol Hill and sticking to talking about the economy. He also made clear to the president’s senior advisers he would fight any attempt to remove him from the job. He felt that was crucial to preserving the ability of future Fed chairs to serve without the threat of removal over a policy dispute.

The Fed has guarded its independence to set monetary policy ever since the very high inflation of the 1970s, when pressure from President Richard Nixon contributed to a series of missteps by the Fed.

In any potential clash between the White House and Fed, what ultimately matters is whether the administration takes steps, including in appointing Powell’s successor next year, that give it more influence over the setting of interest rates, said Peter Conti-Brown, a Fed historian at the University of Pennsylvania.

“It’s already anticipated by virtually everyone that Donald Trump cannot and will not stop talking about the Federal Reserve, but it doesn’t necessarily carry much policy or informational content," said Conti-Brown. “It’s less what he says about the Fed, and more what he does."

The White House and Fed face key differences politically and economically today that could shape any future skirmishes over where interest rates should be set.

Political realignment

First, Trump’s grip on the Republican Party is much stronger. Senate Republicans can play a critical role defending or undercutting the Fed’s independence because of their role approving nominees to the central bank’s board. They largely closed ranks behind Powell during the first term. But institutionalists such as Mitt Romney, Lamar Alexander and Pat Toomey have retired.

While Powell has continued to assiduously court lawmakers, it’s less clear how forcefully Senate Republicans today would defend against potential incursions on Fed independence.

To be sure, Treasury Secretary Scott Bessent told lawmakers at his confirmation hearing this month that he believed that on monetary policy matters, the rate-setting Federal Open Market Committee, or FOMC, “should be independent."

Bessent said Trump’s public commentary on interest rates was no different from that of Democratic senators who urged the Fed last year to lower interest rates. “President Trump is going to make his views known as many senators did," Bessent said at the hearing.

Still, Bessent mused publicly six years ago over whether withering criticisms of the Powell Fed on social media might presage more serious challenges to the Fed’s independence down the road.

“So far, the attacks have mostly been limited to 280 characters," wrote Bessent  in the International Economy Magazine, a quarterly journal. “But if this is what happens with 3% GDP growth and the unemployment rate at 4%, how will the administration, Congress, and the public react to a more serious asset market correction or a meaningful economic downturn?"

Tactical retreats

Already, the Fed has taken steps to fortify its political standing in Trump’s Washington by sidestepping fights over ancillary goals so that it is on sturdy footing to defend its core mission if the president or his advisers make more direct challenges on its monetary policy autonomy.

Michael Barr, the Fed’s vice chair for supervision and a Biden appointee, surrendered his position as the agency’s top bank regulator amid concerns that Trump might oust him. Powell and Barr have said they didn’t think the president had the legal authority to remove Barr, but Barr said he nevertheless resigned the post to avoid what could have been a bruising standoff.

Waging a lawsuit against a sitting president “so that we can have the regulatory policy that favors the last president is not something that any" devotee of central bank independence “could ever defend," said Conti-Brown.

Barr will stay on the Fed’s board of governors. Because the board has no vacancies, that deprived Trump of an opportunity to replace Barr with someone who isn’t currently a Fed governor.

Days before Trump’s inauguration, the Fed announced plans to withdraw from an environmental body of central banks and financial regulators that it joined shortly after Biden’s election in 2020. Powell said Wednesday the group’s work had broadened significantly into areas well outside the Fed’s remit.

Reuters reported last week that the central bank scrubbed a section of its website on “diversity and inclusion." Powell said Wednesday the Fed was working to align its policies with Trump’s recent executive orders and other enacted laws.

Those tactical retreats to head off any politicization of the Fed could allow the central bank to more staunchly defend against any challenges to its monetary policy independence.

“In the poker game he might be playing with Donald Trump, there are places where Jay Powell is willing to fold, and there are places where he is not," said Conti-Brown. “Subordinating the FOMC to the whims of a sitting president is not something Jay Powell will do."

A changed economic landscape

A second crucial difference centers on the economic outlook. Inflation isn’t some imaginary hazard leading the Fed to pre-emptively raise interest rates, as was the case when Powell became Fed chair seven years ago.

Trump soured on Powell in 2018 because the Fed was raising rates to get ahead of price pressures at a time when inflation had been running below the central bank’s 2% goal. Today, by contrast, inflation has been overshooting the target for four years, and the Fed two years ago lifted rates to a two-decade high.

During Trump’s first term, “inflation felt distant and abstract, and now, we’ve just been through a meaningful and painful campaign against inflation," said Nathan Sheets, chief economist at Citigroup.

Because price-setters are more attuned to the risks of high inflation and aware of their ability to pass along higher prices if the economy is strong enough to tolerate them, Fed officials are likely to be much more fearful about losing their inflation-fighting credibility if they let their guard down.

Bullying the bond market

Notably, Trump didn’t call on the Fed on Wednesday to lower interest rates. Instead, he highlighted how his agenda to reduce regulations and boost energy production would put a lid on inflation.

“Trump is savvy enough to know he just won an election because people don’t like inflation," said Sheets.

Tariffs remain an important wild card for the Fed—and a potential flashpoint with the White House—because they complicate the outlook for inflation. The economic backdrop could explain “why he hasn’t been as aggressive as many people had feared out of the gates on tariffs," said Sheets.

Powell, meanwhile, suggested the Fed had turned more cautious after cutting rates last fall because officials want more evidence inflation will return to their 2% goal. Prices excluding volatile food and energy items were up 2.8% in November from a year earlier, according to the Fed’s preferred gauge. That is down from 3.2% one year earlier and 5.2% two years earlier.

Finally, there’s no guarantee that Fed cuts would bring down long-term interest rates without evidence that inflation continues to decline. Put differently, bullying the Fed is one thing, but bullying the bond market is another altogether.

Trump’s economic advisers ought to know that cutting rates too much now would risk higher inflation, said Tom Graff, chief investment officer at Facet, a Baltimore-based investment adviser. Long-term yields could climb “if the market were to view the Fed as making a mistake by cutting."

Write to Nick Timiraos at Nick.Timiraos@wsj.com