Divided Fed highlights dilemma for Trump’s next chair
President Donald Trump seeks to reduce borrowing costs substantially and has made it clear that he anticipates his chosen successor to Jerome H Powell as chair of the Federal Reserve will adhere to this expectation. However, significant divisions within the central bank regarding the future direction of interest rates indicate that achieving this may prove difficult, presenting a challenge for whoever Trump appoints to the leading position. On Wednesday, the Federal Reserve made the decision to lower interest rates by a quarter of a percentage point. It marked the third consecutive reduction since September, lowering interest rates to a range of 3.5 percent to 3.75 percent. However, the decision was anything but unanimous. Six of the Fed’s 19 policymakers voiced their disapproval of the cut, signaling a preference to maintain the current stance.
Recent projections for interest rates published by the central bank underscored the apparent lack of consensus regarding potential cuts in the coming year. Seven officials predicted no changes, while eight advocated for cuts of at least half a percentage point. Powell addressed the media at a news conference on Wednesday, clarifying that the diversity of opinions was to be expected given the current tension between the Fed’s objectives of maintaining low, stable inflation and fostering a robust labor market. However, such a level of dispersion could transform into a significant obstacle for the incoming chair, who is scheduled to assume the role in May. “I take the embrace of the diversity of views on the committee right now as a warning shot to the next chair,” said Vincent Reinhart. “The next chair must persuade his colleagues. That’s the main message.”
The Federal Open Market Committee, responsible for the Fed’s interest rate decisions, comprises all seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and a rotating selection of four presidents from the remaining 11 regional reserve banks. The chair of the Fed holds merely one vote on that committee, a point that Treasury Secretary Scott Bessent recently underscored in what seemed to be an effort to temper expectations regarding the potential impact of Powell’s successor. Kevin A Hassett, is regarded as the leading candidate to succeed Powell. Kevin M Warsh, a former Fed governor, and Christopher J Waller, a current governor, are also among those under consideration. Trump, who is nearing his decision, has been vocal about his expectations regarding it.
“I’m looking for somebody that will be honest with interest rates,” Trump said on Wednesday after criticizing the Fed’s interest rate reduction for being too small and insulting Powell personally. “Our rates should be the lowest rates in the world,” he added. However, the most recent Fed meeting highlighted the significant challenges the next chair may encounter if it seems that he is merely following the president’s directives rather than prioritizing what is best for the economy. “If the next chair comes in with a specific agenda that is not consistent with the economic backdrop, I think that person will lose the room right away,” said Tom Porcelli. Porcelli perceives limited potential for significantly reduced borrowing costs in the coming year, noting that “this is not an economy that is rolling into a recession.” Instead, he anticipates that the context next year will necessitate two quarter-point reductions in March and June. Matthew Luzzetti, perceives diminished opportunities for the central bank to implement cuts in the coming year. He predicts a single quarter-point reduction, but not until September, based on the expectation that growth will accelerate, the labor market will stabilize, and inflation will persist at elevated levels. He stated that such a combination should make the committee “reluctant” to cut interest rates.
