Image Source: Pixabay
 

What will the Federal Reserve do with interest rates now that they’ve cut once this year? Will more cuts come or will they hang tight with current interest rates? Fed chair Jerome Powell said, in his post-meeting press conference, that the Fed was not on a fixed course but would watch the data as they emerge. However, we cannot ignore politics: President Trump clearly wants to see lower interest rates.

The Fed began interest rate cuts in September 2024 with a half-point drop in the Federal Funds rate, followed by quarter-point cuts in November and December. Then they saw employment statistics looking firm while inflation persisted above the Fed’s target of two percent. They held interest rates steady until September 17 of this year, when they lowered the policy rate by a quarter of a percentage point.

Three issues will dominate policy decisions, or possibly just two. Certain to play large roles will be employment and inflation. Politics will likely also influence decisions, though possibly without any open discussion in the Fed’s official meetings. The decision-makers, however, talk among themselves privately before their meetings, and politics cannot be avoided.
 

Employment Data And The Fed

Federal Reserve staff economists examine all data that come out, but in the past have paid especially great attention to the number of new jobs added each month. That data, though, will play a smaller role. Under President Trump, net immigration has slowed or completely stopped, or possibly even reversed—meaning more people leaving than coming in. Our home-grown population of working age is barely increasing, so without immigration we cannot expect job gains.

Not only do economists have to adjust their analysis to the lower population growth numbers, they also recognize greater variability. Many of us were caught by surprise when employment grew rapidly even after we had recovered from the pandemic layoffs. The explanation was a surge in immigration during the Biden administration. The data arrive with a substantial time lag, and also with unavoidable inaccuracy. So economists simply are not sure what the job growth numbers mean. A gain of 50,000 in a month might be great or might be awful, depending on what happened to immigration—and we won’t know that for another year.

Our economic statistics are most useful when the underlying population of working-age people is stable. Surveys are taken of a sample of people, then extrapolated to the population at large. But when we don’t know how large the population is, and when recent immigrants are unlikely to have been in the sample that answered the government’s questions, then the statistics are much less useful. Anecdotes and private data sources gain attention, even if less representative of the whole.
 

Federal Reserve "dot plot" of interest rate expectations Federal Reserve

Inflation Data And The Fed

The Federal Reserve policy makers will also be watching inflation data carefully. Here the Fed’s large staff will come in handy. The price data collected every month will show the result of both underlying inflationary pressures and tariffs. Figuring the contribution of those two forces will be essential to good policy—but also very difficult. Right now it appears that tariffs are not influencing overall inflation much. But total inflation worsened in recent months, leading to the age-old statistics question: are recent changes a blip or the beginning of a trend?

No doubt tariffs will enter into the consumer price data. The Fed will be inclined to ignore tariff-driven price hikes, on the grounds they constitute one-time forces that cannot be fought with monetary policy. Consumers will howl, whatever causes their shopping bills to rise, and some politicians will not grasp the nuance in the statistics.

And that brings the Fed back to politics.
 

Politics And The Fed’s Policies

President Trump clearly wants to see lower interest rates. His latest appointee to the Federal Reserve Board, Stephen Miran, voted against the recent quarter-point rate cut because he wanted a half-point cut. Although the Fed is structured to insulate decisions from politics, no insulation is perfect. And the president has a potential power play available to him.

Interest rate decisions are made by the Federal Open Market Committee (FOMC), which consists of the seven members of the Fed’s Board of Governors and the 12 presidents of the regional Federal Reserve Banks. Only four of the 12 presidents vote. The New York Fed president always votes, while the other presidents rotate for one-year periods as voting members. All presidents take part in the discussions.

The Fed governors are appointed by the president and confirmed by the Senate. They enjoy 14-year terms, though few of them stay on the job that long. On average, we get one new member per year.

The regional bank presidents are selected by their respective bank boards of directors, but subject to confirmation by the Board of Governors. Thus, once a president has appointed a majority of governors, that group could veto any regional president nominee. In practice, this has never happened. But all regional presidents’ terms are for five years, and all expire in February 2026, as highlighted by Jim Bianco. Further, they are “at will” employees and can be fired by the Board of Governors.

The highly-political possibility has President Trump appointing to the Board people who will pursue his agenda. With four votes, they would control the Board and thus enough of the regional bank presidents to have a majority of the FOMC. But this scenario strongly needs highly political appointees who remain loyal to the president. In the past, most FOMC members appreciated the independence of the Fed and used their own judgment in both monetary policy decisions and appointments. This scenario also needs the president’s nominees to win Senate confirmation. If four Republicans vote against a nominee, then the plan doesn’t work.
 

The Federal Reserve’s Interest Rate Choices In Late 2025 And 2026

The Fed seems inclined to cut interest rates again in 2025 and 2026, as the latest FOMC Summary of Economic Projections shows. Although strong arguments can be made against cutting rates, recent employment weakness also provides fair reason for the cuts. And moving on the path to further cuts may deflect the president’s attention from a Fed takeover strategy. Republican senators may be less willing to go along with what some will consider strong-arm tactics when the Fed is already moving in the president’s direction, even if too slowly for the president’s taste.

With these countercurrents, the FOMC will likely continue small interest rate cuts through the end of the year and early 2026. I personally think the weight of economic evidence dictates no further cuts for a while, but politics will influence decisions. Preserving the Fed’s independence may require ceding a little bit of that independence, the thinking will be.

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