Market Expectations and Powell’s Tenure
While the markets anticipate a quarter-point reduction in the federal funds rate by the Federal Reserve (Fed) today, this is not the most eagerly awaited news regarding the US central bank.
The Focus Shifts to Powell’s Successor
What is gaining significance is the name of the person Donald Trump will designate as Jerome Powell’s successor at the Fed.
Although this designation is not expected today alongside the monetary policy decision, it is likely to occur before year-end, despite Powell’s tenure as Fed president not ending until May 2026.
Trump’s Efforts to Undermine Powell
It is clear that Trump has done everything possible to undermine Powell’s leadership, as the latter has not succumbed to Trump’s desire for drastic interest rate cuts.
Trump has failed to influence Powell’s monetary policy decisions and seeks to weaken his standing with the markets. Designating a successor so far in advance undoubtedly damages the image of the central bank chief who will serve as a “lame duck” for several months.
Conditions for Powell’s Successor
The condition for the incoming president is that they must share Trump’s belief that interest rates should be lowered significantly to stimulate economic growth.
Market Divided on Interest Rate Cut
Although the market expects a rate reduction today, not everyone agrees that this is best for the US economy.
- 97% of bets predict a quarter-point cut, lowering the rate to 4.0%
- 3% anticipate a half-point reduction
- No one believes the rate will remain unchanged
However, according to a CNBC survey of 38 economists, strategists, and fund operators, 38% believe the Fed should not lower interest rates today.
Analysts’ Concerns
Some analysts fear that, under Trump’s threat, the Fed may prioritize political motives over technical considerations for lowering the reference rate, which could be risky.
- Economists express concern that the effects of tariffs on US consumers have not been fully felt, leading to inflationary pressures.
- With limited information available due to the government shutdown, job creation remains low.
The Fed is making decisions with limited information, facing political pressures, inflationary yellow flags, and a president under the threat of being sidelined by their successor’s appointment.
Potential Risks for the Fed
Given this challenging scenario, what could go wrong for the most important Western central bank?
The focus is now on the name of the person Donald Trump will designate as Powell’s successor. Designating a successor so far in advance undoubtedly damages the image of the central bank chief who will serve as a “lame duck,” or “crippled bird,” as politicians losing power before their departure are called in the US.
