Trump's MAGA vision may encounter "stubbornness"! Powell firmly defends the independence of the Federal Reserve

According to the Zhitong Finance APP, after the Federal Reserve announced a 25 basis point rate cut as expected, Chairman Jerome Powell clearly stated at the press conference following the rate decision that he is prepared to lead Federal Reserve policymakers to resist politically related pressures after Donald Trump returns to the White House. He asserted that if asked to "resign," he would refuse, insisting that the incoming president has no power to dismiss him or any other senior Federal Reserve leaders, reiterating word for word that "the law does not allow it."

During Trump's first term from 2017 to 2021, he frequently criticized Powell and the Federal Reserve, strongly supporting a low-interest-rate environment. When the Federal Reserve chose to raise interest rates, Trump often immediately expressed radical opposition to Powell's monetary policy on Twitter, even threatening to fire Powell during his term, but ultimately this ended due to procedural issues. At a recent presidential campaign rally, Trump publicly challenged the independence of the Federal Reserve, arguing that the U.S. president should have a say in interest rates and monetary policy.

Recently, the resilience of the U.S. economy and rising inflation expectations have driven long-term U.S. Treasury yields for 10 years and above significantly up to the 4.5% mark. Judging from Powell's neutral comments at the press conference and the Federal Reserve's latest policy statement, the Federal Reserve may significantly slow down the pace of rate cuts next year. The global chief strategist from JP Morgan Asset Management even warned that if Trump wins the U.S. election, the Federal Reserve may pause its rate-cutting easing cycle as early as December. Some economists have begun to worry that the Federal Reserve's pause or slowdown in rate cuts may not align with the "MAGA vision" that Trump and his supporters advocate.

The "MAGA policy tone" promoted during Trump's previous term and the latest election advocates for a more accommodative low-interest-rate monetary policy and tax cuts to drive sustained economic expansion in the U.S., as well as radical trade protectionist policies to promote the comprehensive return of manufacturing to the U.S. Many economists are concerned that after Trump officially takes office next year, he may leverage the majority of Republican seats in the Senate to pressure Federal Reserve policymakers and potentially implant his influence into the committee, ultimately intervening in the monetary policy decisions led by Chairman Powell.

MAGA, short for "Make America Great Again," can refer to the core tone of all policies led by the Trump administration and is also used by some mainstream media to refer to Trump himself and the fervent supporters of Trump in the U.S. The recently popular term "Trump economics" equates to low interest rates and low taxes, with the ultimate goal of making America great again through a fiscal plan dominated by low interest rates and tax cuts.

Powell Answers "NO" Four Times

At the press conference following the Federal Reserve's announcement of a rate cut as the market expected, Powell was repeatedly asked whether Trump would have the authority to fire the Federal Reserve chairman after taking office and how he would respond if Trump asked him to resign. He responded to a series of questions from reporters with four consecutive "NOs." "I will not resign," Powell said firmly on Thursday, especially when asked if he would resign if Trump requested him to do so.

At a press conference following the Federal Reserve's two-day monetary policy meeting, Powell repeatedly stated that Trump had considered firing the Fed chair during his first term in the White House, but he emphasized that neither Trump in the past nor in the future has the legal authority to demote or dismiss the Fed chair in Washington or other senior Fed officials unless someone voluntarily resigns.

"When Powell makes a strong statement that no one will be demoted, what he means is that the leadership of the Fed is united and is defending the principle of Fed independence," said Peter Conti-Brown, a professor at the Wharton School of the University of Pennsylvania and a historian of the Fed. "I think this is a collective statement from the policymakers at the Fed led by Powell, indicating that the elected president has the right to express opinions on the formation of the Fed, but only until there are key positions that need to be filled."

Powell's remarks were striking as he vigorously confronted every political question posed by reporters. He sought to avoid speculation about what policies the incoming Trump administration might implement. However, when it came to protecting the institution he has served since 2012, he did not hesitate to defend the Fed's "absolute independence principle" in monetary policy.

"He is very firm in his belief in the importance of Fed independence, and resigning voluntarily due to presidential criticism would indicate that the Fed is not independent," wrote Ian Katz, managing director at Capital Alpha Partners, in a report to clients.

These comments came just two days after Trump announced his victory in the U.S. presidential election, signaling a potential power struggle between the world's most important central bank and an elected president who insists he should have a say in interest rate policy.

Trump unexpectedly won the U.S. presidential election on Tuesday by a significant margin. He has frequently criticized Powell, despite having personally appointed him as Fed chair in 2018, but he quickly turned to publicly urging him to halt the rate hike process later that year.

Powell also stated at the press conference that the outcome of the U.S. election has no impact on the Fed's monetary policy in the short term. "Right now, the Fed does not know what policies the elected president will have, nor when they will be implemented, so it does not know how these policies will affect the economy and the Fed's dual mandate. The Fed will not guess or make assumptions."

Powell, a steadfast "institutionalist"

To Wall Street financial giants like Goldman Sachs and Morgan Stanley, Powell is seen as a "steadfast institutionalist" among Washington's elite, frequently discussing the importance of central bank independence. In an interview earlier this year, he expressed a desire to complete his full term.

Some analysts believe that Trump has actually abandoned his more provocative remarks about how much actual influence a president should have over central bank decisions. He stated in June that he would allow Powell to complete his current term, which ends in 2026. However, he also mentioned that the president should at least be allowed to offer his own suggestions on policy Regarding whether Trump will intervene in the Federal Reserve's decisions after taking office in January, economists share similar concerns: the voting members of the Federal Reserve Board are appointed by the U.S. Senate, and the Republican Party, which holds the majority in the Senate, may pave the way for Trump to plant his influence within the Federal Open Market Committee (FOMC) of the Federal Reserve. Additionally, Trump may exert pressure on hawkish voting members, leveraging his significant influence among voters to compel them to resign voluntarily. However, given that the FOMC led by Jerome Powell is currently very united and adheres to the principle of "independence," achieving this path will be very difficult for Trump when he takes office in January.

The FOMC is the core institution responsible for formulating monetary policy, consisting of 12 voting members who collectively vote on whether to implement interest rate hikes, cuts, and quantitative easing (QE) or quantitative tightening (QT). This includes 7 Federal Reserve governors nominated by the President and confirmed by the Senate, and 5 regional Federal Reserve Bank presidents, of which 4 rotate in holding voting seats, while the President of the New York Federal Reserve always holds a voting seat.

Moreover, another potential target for the Trump administration is Michael Barr, the Vice Chair for Supervision at the Federal Reserve, who has faced repeated criticism from Trump and several Republicans for his overly stringent financial regulatory framework.

Later on Thursday, Republican Senator Bill Hagerty, a major contender to join Trump's cabinet, stated that "everything should be on the table" when considering Barr's position. "I will consider any legal options we may need to change," he said.

Ultimately, any attempts to dismiss or demote Powell or his FOMC colleagues could face a court battle that would be significant in American political history. Many legal scholars believe that the President may not have the authority to dismiss Federal Reserve policymakers, but some argue that there may be legitimate avenues to demote Barr, who has regulatory responsibilities.

Expectations for a Pause in Rate Cuts in December Heat Up

Meanwhile, the Federal Reserve announced a 25 basis point rate cut on Thursday, Eastern Time, marking the second consecutive cut, but did not opt for an unexpected 50 basis point cut as it did in September. Although the market expects further rate cuts from the Federal Reserve in the coming months, some investment institutions and economists have lowered their expectations for how low rates will go in this round of cuts, partly due to the possibility that Trump's election could trigger a significant surge in inflation.

Trump has promised to implement more aggressive tariff policies, deploy the military to combat illegal immigration, and extend tax cuts—policies that could exert severe upward pressure on prices and long-term U.S. Treasury yields.

Following Trump's announcement of winning the presidential election, an economist team from Nomura now expects the Federal Reserve to cut rates only once by 2025, having previously anticipated four cuts by that year. David Kelly, the global chief strategist at JPMorgan Asset Management, warned earlier this week that if Trump wins the U.S. election, the Federal Reserve may even pause its rate-cutting easing cycle as early as December At the press conference, Jerome Powell reiterated that the Federal Reserve's future policy decisions will depend on upcoming economic data, and the Fed will not attempt to predict fiscal or trade policies. However, some economists have indicated that the combination of resilient consumer spending and still sticky core PCE inflation data, along with Powell's emphasis on being more cautious as they approach neutral interest rates to achieve a dual risk balance, may suggest that the threshold for subsequent rate cuts is gradually increasing.

"We do not know the timing or substance of any policy changes," Powell stated. "Therefore, we do not know what the impact on the economy will be, especially whether and to what extent these policies will affect the realization of our target variables: maximum employment and price stability."

Lindsey Piegza, chief economist at Stifel Financial Corp., noted that the Fed Chair committed to further rate cuts in the future but did not provide a timeline for managing expectations. "He left the door open for a potential policy pause at the December meeting, provided that economic growth data remains stable and inflation remains sticky."

Powell pointed out that the U.S. economy is performing better than expected and noted that the inflation data for September was above expectations. Although he insisted that all options are still on the table, these neutral comments suggest that the Fed does not rule out the option of pausing rate cuts at its last meeting of the year in December. Powell stated that the Fed will make a decision in December and added that the Fed will have more data before then.

CME's "FedWatch Tool" shows that after Powell's press conference, more rate futures traders are betting on a pause in rate cuts in December, with the probability of a pause increasing from less than 10% to 30%; traders generally expect the Fed to pause rate cuts in January 2025 to initiate a staggered rate-cutting process, followed by a total of three rate cuts starting in March 2025, with a baseline expectation of reaching a target federal funds rate range of approximately 3.50%-3.75% by the end of 2025