This week’s Federal Reserve (Fed) meeting will begin to shape expectations for the new Fed chairman to be appointed by President Donald Trump. However, this process may push the Fed into a difficult balance between inflation concerns and Trump’s demands for aggressive interest rate cuts.
A quarter-point interest rate cut is almost certain at the meeting. However, the decision text and economic projections will show whether the new chairman will inherit a more cautious institution or have room to maneuver with a more dovish short-term outlook.
Trump wants lower interest rates, especially to stimulate the housing sector.
However, according to economists, strong growth in 2026, demand supported by tax refunds, and the associated risk of persistent inflation could lead to a similar dilemma for the new chairman, Powell, as he faces. BNP Paribas Chief Economist James Engelhof notes that economic data “offers little justification for aggressive rate cuts.” There are also significant disagreements within the Fed on this issue. New projections to be released along with the decision text will show whether some regional Fed presidents will maintain a more cautious stance. Medium-term estimates predict only one rate cut in 2026. Powell’s term expires in May; Trump has announced he will nominate a new chairman at the beginning of the year. However, assessing the state of the economy is becoming more difficult: due to the 43-day government shutdown, the Fed is forced to fill in the gaps in labor and inflation data with custom estimates. Economists expect approximately 2% growth, 2.8% inflation, and 4.4% unemployment in 2026. This outlook reinforces the objections of some hawkish Fed officials that “interest rates cannot be cut until inflation clearly falls.” Tim Duy of SGH Macro Advisors expects a hawkish rate cut from the Fed this week and anticipates that further cuts will be tied to a higher threshold. However, determining the level of a “neutral interest rate” is becoming more complicated due to the tariffs imposed during the Trump era, immigration restrictions, and potential productivity shocks stemming from artificial intelligence.Trump’s close associates are developing different arguments for lower interest rates. The administration’s economic advisor, Kevin Hassett, argues that a productivity boom driven by artificial intelligence could reduce inflation risks. In addition, Trump’s signaling of changes in the appointment processes of Branch Presidents makes the internal balance of the Fed even more delicate.
Some analysts, however, warn that excessively rapid cuts could backfire.
According to Citi Chief Economist Nathan Sheets, if the Fed “cuts more than markets deem reasonable,” long-term interest rates could rise: “This would put pressure on the housing market and have the exact opposite effect of the economic stimulus the administration is aiming for.”
