Trump publicly comments on Federal Reserve policy, calling for an immediate rate cut

According to the Zhitong Finance APP, on Thursday, U.S. President Donald Trump publicly commented on Federal Reserve policy for the first time, calling for a reduction in interest rates. In an online speech at the World Economic Forum in Davos, he stated, "I demand that interest rates be lowered immediately. Moreover, global interest rates should also decline accordingly, and rates should follow our lead."

However, Trump's pressure may not significantly affect borrowing costs. The president's ability to pressure Federal Reserve officials or replace them is limited. Although the Federal Reserve has already cut rates by 1 percentage point in the last four months of 2024, further cuts seem to be temporarily shelved. Federal Reserve officials have indicated that the current economic growth and employment situation remain resilient, and inflation has not significantly decreased, thus there is no immediate urgency for rate cuts.

According to the predictions of Federal Reserve policymakers, interest rates may slightly decline by the end of 2025, but not by much. The interest rate futures market pricing on Thursday showed that the highest likelihood of a rate cut in 2025 is a quarter of a percentage point. The median forecast of policymakers indicates a potential cut of 0.5 percentage points in 2025, followed by another 0.5 percentage points in 2026.

To achieve a rate cut, inflation needs to resume its downward trend. The Federal Reserve has consistently emphasized its "data-dependent" stance, meaning that policy decisions will be based on economic data performance. Additionally, Trump's policy proposals (including immigration, trade, tax, and deregulation) may generally stimulate economic growth and inflation, further weakening the rationale for rate cuts.

Over the past year, interest rates in most developed countries have been declining, with Japan being an exception. Inflation in these countries has returned to pre-COVID levels, but economic growth remains generally weak. However, Trump's influence over foreign central banks is far less than his influence over the Federal Reserve.

Trump's comments on the Federal Reserve and monetary policy are not new. During his first term, Trump publicly criticized Federal Reserve Chairman Jerome Powell, whom he nominated, multiple times and discussed the possibility of removing him. In the 2024 presidential campaign, Trump stated that he would not seek to dismiss Powell before his term ends in May 2026.

Unlike other recent presidents, Trump has taken a tougher stance on the Federal Reserve. President Biden has almost never publicly commented on the Federal Reserve during his term. Powell stated to Congress last July that he had not spoken with President Biden for over two years. Powell believes that the independence of the Federal Reserve is a crucial part of its responsibilities. In September of last year, he stated, "Isolating the central bank from direct political control helps avoid unfair monetary policy that favors the current administration. Our duty is to serve all Americans, not a particular political figure or specific issue."

Trump's ability to influence Federal Reserve policy through personnel appointments is also limited. The Federal Open Market Committee (FOMC) is a decentralized body that includes seven members of the Federal Reserve Board and the presidents of 12 regional reserve banks, of which only five have voting rights. The presidents of regional reserve banks are elected by their respective boards, independent of presidential or congressional influence.

While the president has the authority to nominate members of the Federal Reserve Board, it is much more difficult to remove them. According to the Federal Reserve Act of 1913, the president can only remove board members "for cause." Powell stated in November 2024 that he would refuse to resign even if Trump asked him to. When asked whether the president has the authority to fire or demote the Chair of the Federal Reserve, Powell made it clear that "the law does not allow it."

Additionally, the Trump administration may face some vacancies at the Federal Reserve. Federal Reserve Vice Chair Michael Barr plans to resign from his top financial regulatory position at the end of February 2025 but will continue to serve as a governor. The term of Vice Chair Philip Jefferson, who is responsible for monetary policy, will end in 2026. In the next four years, only one Federal Reserve governor's term will expire in 2026, which is Adriana Kugler.

Whether Trump attempts to push Powell out early or not, speculation about his next chair nomination will continue to heat up. Any nomination will require Senate approval. Given that some of Trump's unconventional nominations during his first term faced bipartisan opposition, the future nominations' passage remains uncertain.

Next Tuesday, the Federal Open Market Committee of the Federal Reserve will begin a two-day policy meeting. Trump's potential impact on the economy will undoubtedly be a significant topic of discussion, but his requests may be ignored