Crashes the Fed

Trump crashes the Fed's consensus

The threat of stagflation means the risk of getting the policy wrong is high for Powell — and no less so for Trump, whose presidency could ride on the outcome.

By Victoria Guida

President Donald Trump’s onslaught against the Federal Reserve, and his installation of a top lieutenant on the central bank’s board, have made the Fed’s interest rate decision Wednesday one of the most politically charged ever.

On the one hand, the outcome — a small rate cut — is unlikely to be affected by either the addition of White House chief economist Stephen Miran or the continued presence of Lisa Cook, whom Trump is trying to oust from the board. But the vote could be a lot messier than usual at the consensus-driven central bank as Fed officials grapple with two problems they can’t fight simultaneously — a weakening job market and rising prices.

That mix of political and economic turmoil will test Fed Chair Jerome Powell’s ability to build a policy consensus as he aims to protect both the U.S. economy and the central bank’s autonomy. That unity matters to him because it sends a stronger message to markets about where the Fed stands. But Trump’s goal is to shake up the consensus at the Fed, whose policies he says are holding back the economy.

“The institutional norms of collegiality are intense at the Fed, so I could see this being a meeting that is cool and correct without many fireworks,” said Peter Conti-Brown, an expert in Fed history at the Wharton School of the University of Pennsylvania. “The big things to watch are whether we’re going to have dissents, which I’m almost certain we will have, and whether we have a three-way split.”

Indeed, Powell could see dissents from officials, such as Miran, who want a larger rate cut, but also perhaps even from policymakers who feel the Fed should not be lowering borrowing costs at all, given the uptick in inflation.

The potential drama signals a transition on both the political and economic fronts in a year marked by the president’s relentless calls for lower rates.

Wednesday’s rate cut will be the central bank’s first move to reduce borrowing costs this year, with Powell arguing that the slowing job market is now a bigger risk than the potential that Trump’s sweeping tariffs will lead to spiraling price increases.

Markets will be eagerly watching the 2 p.m. decision for hints on whether more rate reductions are in store. The threat of stagnant growth and inflation — a phenomenon known as stagflation that the U.S. hasn’t experienced in four decades — means the risk of getting the policy wrong is particularly high for Powell. And no less so for Trump, whose presidency could ride on the outcome.

On the political side, Miran’s presence will offer a more direct line from the president to the Fed. He is not resigning from his job as chair of the White House Council of Economic Advisers, sparking outrage from Democrats by opting instead to take an unpaid leave of absence, citing the fact that his term ends in January.

Trump’s push for Miran, along with his crusade against Cook for alleged mortgage fraud, demonstrates the extraordinary lengths to which he is going to gain a majority on the Fed’s board. The White House drove Miran’s nomination through the Senate at lightning speed, and it is taking the president’s move to fire a sitting board member all the way to the Supreme Court. The question of who would participate in this week’s meeting wasn’t settled until Monday night, when a federal appeals court rejected Trump’s bid to quickly fire Cook, less than an hour before Miran was confirmed.

Miran’s behavior could offer a window into what Trump actually expects of Fed officials. The president says interest rates should be 3 percentage points lower, a dramatic decrease that would be far larger than markets expect or than economists predict is wise.

Miran, who has a Ph.D. from Harvard University, is unlikely to make the case for such a large increase off the bat, but his stance will be instructive. Other Fed officials could be sympathetic to the idea of a half-percentage-point cut, rather than the expected quarter-point reduction, given that job growth is showing signs of stalling. Recent data has shown that the labor market was also far weaker than previously thought at the outset of the year.

Fed board members Christopher Waller and Michelle Bowman, who were both named to the central bank in Trump’s first term, advocated for a rate cut in July, citing troubling signs in the job market. Waller is also on Trump’s short list to be Fed chair.

“I’d love to see a dissent from someone who wasn’t appointed by Trump, because I think these are hard questions,” said Jason Furman, who previously served as CEA chair under President Barack Obama and is now a professor at Harvard.