Trump Keeps Squeezing The Next Fed Chair

President Donald Trump’s future Federal Reserve chair was already facing a daunting task: juggling wary financial markets, hard-to-interpret economic indicators, the sprawling and complex internal politics within the central bank itself and a brash president whose quest for lower interest rates has consumed much of his attention this year.

But as he homes in on his ultimate pick, Trump is ratcheting up the tension further for whomever gets the job after Fed Chair Jerome Powell by pushing for policies that could make inflation worse, even as he continues to pressure the Fed to declare victory over price spikes.

One of the president’s ideas for increasing affordability is doling out “tariff dividends” — $2,000 checks to families making under $100,000. If that sounds familiar, you might remember that former President Joe Biden sent out checks in 2021 as the economy was recovering from the Covid pandemic.

You might also remember the four-decade-high inflation that came afterward. It’s unclear why larger checks sent out now, when inflation has come down considerably from its peak but is still elevated, would lead to a more productive result. (Treasury Secretary Scott Bessent’s response, given to Fox News: “Maybe we could persuade Americans to save that.” He cited the administration’s rollout of so-called Trump accounts.)

Trump also continues to dig in on tariffs that are nudging up prices on a range of goods, and next year will bring potentially high-stakes trade negotiations with Canada and Mexico. Those dynamics will continually test the Fed’s working theory that tariffs will only push up prices once rather than leading to a more troubling cycle of inflation.

And, of course, the president continues to demand lower interest rates from the Fed, an interplay that could erode the central bank’s credibility and weaken its ability to constrain inflation.

“Putting Joe Biden’s inflation and affordability crisis behind us has been a Day One priority for President Trump, and this priority has informed nearly every major administration policy announcement,” White House spokesperson Kush Desi said in a statement, adding that any conclusions about potential policies are speculation “unless details are officially unveiled by the administration.”

It’s true that the tariff payouts plan would require the consent of Congress, which is always an uncertain prospect. But the idea is an example of how Trump could further complicate the Fed’s tough task of cushioning a weakening labor market and avoiding problematic levels of inflation.

In other words, the next Fed chair’s mandate grows more precarious by the day, and the tensions will be tricky to navigate for anyone, even longtime Trump adviser Kevin Hassett, now seen as the frontrunner for the job.

The PhD economist and top White House aide has been a loyal messenger to the president, including in ways that make even some of his friends worry about the Fed’s independence from politics should he be tapped as chair.

But there are probably limits to how much an authoritative Fed chair can communicate in a way that serves the Trump administration’s political messaging. Even an experienced political communicator like Hassett would be hard-pressed to reconcile the competing policy and political pressures coming from the White House, a task he’d be asked to perform constantly as the nominee.

The simultaneous notions that you should cut interest rates, that the economy is doing great and that inflation isn’t driven by tariffs don’t hang neatly together. The two simplest arguments for lower rates are that the economy is weakening enough to merit action despite elevated inflation, or that you think prices won’t keep rising as quickly after businesses absorb tariffs.

Another contender for the job, Fed board member Christopher Waller, has been making a mix of both arguments. In the Fed chair sweepstakes, Wall Street investors and central bank insiders have tended to favor Waller, who was appointed to the Fed by Trump in his first term and has proved a forceful defender of rate cuts. But he doesn’t have the relationship with Trump that Hassett does. And he, too, would likely struggle to balance all these competing imperatives, though he’s making a reasonable go at it.

Waller laid out his takeaways from available economic data in a recent speech. “First, that the labor market is still weak and near stall speed,” he said. “Second, that inflation through September continued to show relatively small effects from tariffs,” which supports the idea that import duties “are not a persistent source of inflation.”

Waller’s colleagues have agreed enough to lower rates a couple of times this fall, with another cut expected next week, but they seem hesitant to go further in the new year. To fulfill Trump’s wishes for dramatically lower rates, the next Fed chief will have to make a convincing case to the rest of the central bank’s rate-setting committee that lowering borrowing costs is the right move on economic grounds.

And consensus-building across the Fed’s rate-setting committee — made up of 19 total members of which 12 have a vote — is no guarantee (as the central bank’s divisions lately demonstrate). Former Fed Chair Janet Yellen started the practice of speaking to each of the committee members before every rate-setting meeting, a tradition that Powell has adopted.

“They should just settle for someone who’s going to be credible and get them the low rates they need,” said Adam Ozimek, chief economist at the think tank Economic Innovation Group.

As Deutsche Bank economists wrote in a note to clients Wednesday, Hassett might have trouble convincing his colleagues to cut rates “if his primary objective was to implement the President’s stated goal” of dramatically lower interest rates that could risk reigniting inflation.

“Hassett could prove more effective if he moved towards the center of the Committee and tried to build a consensus around a more moderate policy path, such as moving a bit faster” to ease off the economy, they wrote.

The new Fed chair will also have to have enough inflation-fighting credibility to keep investors from pushing up longer-term yields for fear that price spikes down the line won’t be reined in.

Markets have been relatively tame amid speculation that Hassett will be the pick, although the Financial Times reported Wednesday that bond investors have privately warned the Treasury Department about putting Hassett at the helm.

Maybe there’s a way for a new Fed chair to pull all this off. Mohamed El-Erian — who is, among other roles, the chief economic adviser at Allianz, parent company of asset management giant PIMCO — argued that there’s a credible path forward at the central bank for both much lower rates and an optimistic outlook on the economy.

El-Erian’s take is that there will eventually be significant productivity gains that flow from advances in areas like artificial intelligence, which will allow for faster growth without problematic inflation.

He argued that the next Fed chief should advocate for reforms that lead to more extensive considerations of factors that affect what the economy is putting out, not just how much demand there is for goods and services, an analysis he believes would lead to lower rates over time.

“What if AI decouples GDP from employment?” he said. “All of this requires much more analysis of the supply side than they are used to.”

“If the next Fed chair comes in, and their only objective is to accelerate the rate cuts, whoever the Fed chair is will face challenges,” he added. Instead, he said, the person should come in and say, “‘Guys, we’ve made forecasting errors. … We really need to look at how we do what we do.’”

Still, in the short term, El-Erian conceded, the road to lower rates will be more difficult. That could provoke Trump’s wrath.

Last month, Hassett said at an event hosted by the Economic Club of DC that the president knows he wouldn’t act in a partisan way if he were to get the job. He also attempted to offer a reassuring message to the audience about his own credibility in the role: he won’t have to keep proving himself.

“Once you trust someone, then you basically have the authority to be independent because you’re trusted,” he said of the dynamic with Trump.

That trust is set to undergo an extreme stress test if he gets the job.