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The Federal Reserve gathers on Tuesday for its first meeting of 2025 under the looming shadow of a new US president who is already posing challenges to the central bank with his words and possible actions.
Trump hinted at a coming clash with Fed policymakers as he spoke virtually before the World Economic Forum last week, saying he would "demand" lower interest rates.
Trump doubled down on his comments later while talking to reporters, noting that he wants rates to come down "a lot" and that he thinks the Fed will listen to him. He said he expects to talk directly with Fed Chair Jerome Powell "at the right time."
Where Trump and Powell could be at odds is that Fed officials have sent multiple signals in the opposite direction, hinting that rates may not be changing for a while after being lowered by a full percentage point at the end of 2024.
And investors are betting rates won't change at the Fed's policy meeting this Tuesday and Wednesday in Washington, D.C.
What Fed officials repeatedly have made clear in the run-up to this meeting is that they are increasingly concerned about signs of persistent inflation, citing that as a reason to move cautiously in 2025.
Some also have aired concerns behind closed doors that the trade and immigration policies of the new Trump administration might provide even more upward price pressure.
In 2017 U.S. President Donald Trump and Federal Reserve Governor Jerome Powell at the White House. (Xinhua/Yin Bogu via Getty Images) ·Xinhua News Agency via Getty Images
In fact, Fed officials recently lowered their forecasts for additional rate cuts in 2025 from four to two, due in part to their concerns about inflation and the economic effects of Trump's agenda.
'Rate hikes are possible'
Some watchers of the US economy are now raising the possibility that the Fed could even be forced to raise rates this year — a move that would surely invite Trump’s wrath.
Harvard economist Ken Rogoff told Yahoo Finance he doesn’t think the Fed will fire off the two cuts predicted.
"I think the odds of a hike are the same as the odds of a cut," he said, pointing to the potential for higher deficits and investments in AI driving the economy.
BNY CEO Robin Vince told Yahoo Finance he also thinks rate hikes are possible but that it's more likely the Fed will hold rates steady for a while. If the Trump administration unveils new tariffs on China and the European Union, that opens more extreme possibilities.
"I think rate hikes are possible. Anything is possible. You've got to be prepared. Being resilient really matters," BNY CEO Robin Vince told Yahoo Finance at the World Economic Forum in Davos, Switzerland.
BNY CEO Robin Vince speaks during the World Economic Forum meeting in Davos, Switzerland. REUTERS/Yves Herman ·REUTERS / Reuters
But hiking rates "doesn't feel like the most likely outcome. To me, the Federal Reserve has been on a path that looks like they can pause for a little while and take stock of where things are."
Nouriel Roubini, CEO of Roubini Macro Associates and professor emeritus at the Stern School of Business at New York University, said he sees no cuts happening this year but wouldn’t take the possibility of a rate hike off the table.
"The risk is the Fed that told us last year four cuts this year, then in December said only two cuts. And now the markets are pricing maybe only one cut, there will be zero cuts,” Roubini said.
If core inflation goes higher, he added, a rate hike cannot be ruled out, even though that’s not his baseline. Tariffs, restrictions on immigration, and high deficits could add more inflationary pressures.
"This stuff that can increase inflation … literally this year," he said.
Federal Reserve governor Michelle Bowman said earlier this month that the Fed's rate cut in December was the "last step" in the central bank's "policy recalibration."
Kansas City Fed president Jeff Schmid recently said, "I believe we are near the point where the economy needs neither restriction nor support and that policy should be neutral."
Schmid added that he is now in favor of adjusting rates "gradually."
Trump’s new comments last week suggested that he may not be so patient as he waits for rates to fall further, setting up a possible collision course between Trump and Powell in the weeks or months ahead.
The president's comments at the World Economic Forum were not his first on the subject this year, either. At a Jan. 7 press conference, Trump also said "interest rates are far too high."
On the campaign trail in 2024, Trump regularly weighed in with criticisms of Powell, offering that the president should "have a say" in Fed decisions and that Powell had "gotten it wrong a lot."
In 2018 and 2019, Trump lobbed regular critiques at Powell — whom he appointed to the role — as the Fed raised rates and triggered a stock market sell-off that year, at one point likening the Fed chair to "a golfer who can’t putt."
After Trump’s win in November, Powell has also staked out seemingly immovable ground, saying there is “no legal authority” for him to be removed before his term as chair ends in 2026. Trump said last month on NBC's Meet the Press that he has no plans to remove Powell before the chair's term is up.
Roubini warned that if the Fed lost its independence it would make inflation worse because he believes inflation expectations would rise and the bond market would send interest rates higher.
Even holding rates steady may result in a clash.
"I think that even no cuts, as opposed to raising rates, puts the Fed on a collision course with this administration because this administration wants easy money to strengthen economic growth," Roubini said.
