Powell Under Siege as Fed Plans to Stand Pat on Rate Cuts

Jerome H. Powell has rarely had it easy during his tenure as chair of the Federal Reserve. Under his watch, the central bank has had to navigate through two global trade wars, a once-in-a-century pandemic, multiple geopolitical conflicts overseas and the worst inflation shock in decades.

But with just nine months to go until his term as chair is up, Mr. Powell’s circumstances have become particularly precarious.

Mr. Powell is facing relentless attacks from the White House and the recurring threat of being ousted by President Trump, while a handful of candidates openly jockey to replace him. He must grapple with all of this while managing divisions in his own ranks about when to lower interest rates again after a long pause.

The Fed is widely expected to hold interest rates steady on Wednesday for its fifth straight meeting, a decision that would undoubtedly anger Mr. Trump and add yet more fuel to a pressure campaign that has expanded beyond the central bank’s handling of the economy to how Mr. Powell manages the institution itself.

“There’s a deeper existential issue that Powell is wrestling with that goes beyond how much to cut rates,” said Mark Spindel, chief investment officer at Potomac River Capital, who wrote a book on central bank independence. “This is about being openly challenged on whether the Fed and its institutional structure should exist.”

Avenues of Attack

The lengths the Trump administration has been willing to go to try to undermine the Fed and discredit Mr. Powell were on full display in the days leading up to Wednesday’s meeting.

With less than 24 hours’ notice, the president announced last Wednesday evening that he would join a tour of renovations at the Fed’s headquarters in Washington the next day. Top White House officials had hounded the central bank to arrange the tour after accusing Mr. Powell of mismanaging the work and allowing its costs to balloon beyond what was initially budgeted.

The $2.5 billion project has become the latest front in the White House’s fight with the central bank. Administration officials have cited the renovations as potential grounds to fire Mr. Powell, something the president can do only if there is evidence of gross misconduct, malfeasance or other forms of “cause.” While Mr. Trump has signaled he would let Mr. Powell serve out his term, he has a draft letter dismissing him.

Donning hard hats, Mr. Trump and Mr. Powell sparred on Thursday about the true costs of the renovations, a political spectacle that gave the president the opportunity to demand lower interest rates directly from the man in charge of setting them.

Mr. Trump wants interest rates to be three percentage points lower, arguing that the Fed is simultaneously holding back an economic boom and making the country’s debt payments more expensive. The Fed has opted instead to keep borrowing costs steady since January, a pause it enacted after lowering them by a percentage point last year.

That disconnect has also prompted the president’s top political allies to turn up the heat on the Fed in other ways.

Scott Bessent, the Treasury secretary, recently accused the Fed of “mission creep” that had provoked “justifiable criticism that unnecessarily casts a cloud over the Fed’s valuable independence on monetary policy.” He called on the central bank to conduct a “comprehensive institutional review across its entire mission to buttress its credibility.”

Speaker Mike Johnson, Republican of Louisiana, went so far as to signal that he is open to modifying the Federal Reserve Act, the 1913 law that established the central banking system and codified its political independence.

The administration’s onslaught on the Fed and Mr. Powell does not come without costs.

David Wilcox, who is a senior fellow at the Peterson Institute for International Economics and a former leader of the Fed’s research and statistics division, argues that it raises the threshold for the central bank to act in a way that aligns with the administration’s wishes and still be seen as credible across Wall Street.

“The irony is that the administration is shifting the odds against it that the Fed will move in a manner that accords with what it wants,” said Mr. Wilcox, who is also the director of U.S. economic research at Bloomberg Economics. “A Fed that is attuned to guarding its independence will want the case for cutting to be just a little clearer and a little more unambiguous than if the administration had remained silent.”

Resuming Rate Cuts

A Fed that operates independently of the White House is considered crucial to make certain that borrowing costs are set with the economy’s best interests in mind, rather than what is politically advantageous. Elevated interest rates might make life costlier for Americans, in turn denting a president’s approval ratings, but they also may help keep inflation in check and over time ensure the economy is on steady footing.

The president, however, has framed the Fed’s decision to hold off on interest rate cuts this year as “political,” citing the fact that the central bank moved aggressively just months before the November election with a half-point reduction — double what it typically does.

Fed officials have implicitly rebuffed that characterization. They argue that their wait-and-see approach has been prudent given that the economy has held up relatively well so far despite interest rates set in a range of 4.25 to 4.5 percent, and the fact that Mr. Trump’s policies have raised the specter of higher inflation as growth slows.

But there are nascent signs that officials are nearing a potential turning point on restarting interest rate cuts. The question then becomes one of timing.

Two influential Trump-appointed policymakers — Christopher J. Waller, a Fed governor, and Michelle W. Bowman, the Fed’s vice chair for supervision — have indicated they favor an interest rate cut as soon as this week’s meeting, pointing to fragility in the labor market. As a result, they could wind up opposing the central bank’s decision to keep borrowing costs steady on Wednesday. That would be the first time in more than 30 years that two officials of their standing dissented.

Dissents, while rare, are often seen as a healthy sign of debate and only natural at a moment of such acute economic uncertainty. But against the backdrop of Mr. Trump’s attacks on the central bank, more dissents down the road could give the impression that Mr. Powell had lost sway over the policy-setting committee.

At their last meeting in June, most officials at the Fed were comfortable lowering borrowing costs by a half-point this year even though they expected inflation to rise as the economy slowed. So to cut interest rates in September, those policymakers most likely need to see that the labor market has cooled off further, and for inflation not to rise more than is already expected.

But they will also need to convince a sizable group of colleagues less worried about the labor market and more uneasy about the inflation outlook. As of June, seven of the 19 policymakers forecast that the Fed would do nothing the rest of the year.

James Bullard, dean of Purdue’s business school and former president of the Reserve Bank of St. Louis, said he expected the Fed to restart interest rate cuts in September and lower borrowing costs by another quarter-point in December. The moves would be warranted not because of a weak labor market but rather because they would shift the Fed’s monetary policy toward a more neutral setting, that is neither stimulative for the economy nor restrictive. That would ensure that the Fed was “well positioned in case some shock occurs,” Mr. Bullard said.

“The policy rate is too high for the current situation,” he said. “They would have quite a ways to go right now if they had to ease.”

But in a sign that Mr. Trump’s pressure campaign is leaving lasting damage, Vincent Reinhart, a former Fed economist who is now at BNY Investments, said any move to cut interest rates in the near term would “look terrible.” He ultimately expects there will not be a strong enough economic case to reduce borrowing costs until December.

Fed Chair-in-Waiting?

Mr. Trump may have, for now, backed away from his threat to fire Mr. Powell. But one weapon at his disposal is the ability to name a successor early enough to potentially erode the current chair’s influence. What the president is seeking is someone who will back lower borrowing costs, raising concerns that the next chair is already compromised and will not uphold the institution’s independence.

The administration is in “no rush” to identify its pick, according to Mr. Bessent. But some leading candidates have begun to actively audition for the role, efforts that are likely to only intensify as the year progresses.

The two leading contenders in the administration — Mr. Bessent and Kevin Hassett, the White House’s top economic adviser — have already made the case for the central bank to cut interest rates. Kevin Warsh, a former Fed governor also at the top of the list, has tied lower borrowing costs to a smaller balance sheet. Mr. Waller has said he would accept the job if Mr. Trump offered it.

At some point, Wall Street may start to put more weight on the signals sent from whoever is leading the race, and certainly will do so once Mr. Trump makes his selection.

“As every week passes, what Powell is saying is going to be mattering less and less, and what the incoming chair is saying will be mattering more and more,” said Mark Dowding, the chief investment officer for fixed income at RBC BlueBay Asset Management. “That’s just an inevitability.”