Trump & Powell: Dissension Continues

As Expected, President Lashes Out at Fed Decision

No surprises last week on the monetary policy front, or in President Donald Trump’s reaction to the Federal Open Market Committee decision on Wednesday. Following Trump’s call for “interest rates [to] drop immediately,” the FOMC decided to leave rates unchanged. At his press conference following the decision, Federal Reserve Chairman Jerome Powell repeatedly refused to take the bait from journalists, and would not comment on the President’s demand.

Trump’s reaction to the FOMC decision and the Powell press conference was swift. Soon after the central bank decided to ignore his demand, he blasted Powell on Truth Social: “Because Jay Powell and the Fed failed to stop the problem they created with Inflation, I will do it by unleashing American Energy production, slashing Regulation, rebalancing International Trade, and reigniting American Manufacturing.”

Two additional developments are key in assessing the market impact of the collision course that the Fed and President appear to be on. Figures published yesterday by the US Bureau of Economic Analysis indicate that the Fed’s preferred inflation measure, the Personal Consumption Expenditure index, rose by 0.3% in December on a month-on-month basis, speeding up from 0.1% in November. As a consequence, the annual PCE inflation accelerated from 2.4% in November to 2.6% in December. The latter was the fastest inflation recorded since May. The core PCE inflation rate, which excludes food and energy, was stuck on an annual basis at 2.8% for the third month in a row. By comparison, the Fed’s annual inflation target is 2%.

Second, after a few days of suspense regarding whether tariffs would, in fact, be imposed, the President confirmed yesterday that a variety of sectors — computer chips, pharmaceuticals, steel, aluminum, copper, oil and gas— would soon face levies. Following that, his Press Secretary, Karoline Leavitt, specified that Canada, Mexico and China would be among the countries facing tariffs. This reversed the upward movement in equities yesterday and pushed up long-dated Treasury yields.

The threat of tariffs is already being felt in essentials’ prices. Even though Trump imposed, and then canceled, tariffs on Colombia, the world’s third largest coffee producer, coffee prices surged to a record last week and have continued to stay elevated. If the levies actually come into effect on other items such as steel and copper that Trump referred to in his speech yesterday, expect the impact to be felt as well on other products where they serve as input.

Last week’s developments provide a preview of what may happen with the President’s relationship with Chairman Powell and the Federal Reserve. In light of the upward move in inflation — relating to all the three major indexes — the FOMC will not be able to justify a reduction in interest rate at its next meeting on March 18 and 19. Consequently, expect Trump’s ire to be expressed repeatedly, increasing volatility in equities, bonds and the dollar. And if that revives Treasury Secretary Scott Bessent’s suggestion for creating a “Shadow Chair,” that would also contribute to market uncertainty.

After he repeatedly misjudged the staying power of inflation, it will be quite a spectacle to watch Powell handle the President’s criticisms in forthcoming press conferences!

Dr. Komal Sri-Kumar

President, Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

February 1, 2025

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