US President Donald Trump next year is set to have his greatest chance yet to push for more control over a Federal Reserve that has so far defied his relentless campaign to aggressively lower interest rates.
That control rests on who Mr Trump will nominate to succeed Jerome Powell as Fed chair once his term ends in May. Mr Powell, the silver-haired central banker who first made his name at the Carlyle Group, has maintained a pragmatic and even-keeled approach during his term at the helm of the Fed.
That approach served Mr Powell well in the last few months as the rate-setting committee has been deeply divided over the speed and scope of future cuts. He most recently steered the Fed to lower its benchmark overnight rate by 25 basis points for a third straight time in a 9-3 vote.
“When the committee is divided, you’re less sure where the funds rate is headed and so they are less effective in conveying a vision of policy. And so that’s where they are,” Vincent Reinhart, chief economist at BNY Investments, said in an interview.
The dissents mark a departure for Mr Powell, who, throughout much of his term, steered the committee to move in unison in setting the nation’s interest rates.
“I think that Chair Powell is preparing his committee for the next [Fed] chair,” Mr Reinhart said.
“He has stayed in the background and let them fight over the right path for policy, he has tolerated dissent, and so I think he’s basically letting his colleagues be prepared if they have a chair that they don’t agree with.”
Mr Trump is expected to name his nominee to succeed Mr Powell soon, with White House economic adviser Kevin Hassett and former Fed governor Kevin Warsh considered to be the front-runners. Mr Trump also interviewed current Fed governor Christopher Waller for the position last week.
The President has made it clear that immediately cutting interest rates is a “litmus test” for whoever the next Fed chair will be. The Fed has cut rates by a cumulative 75 basis points this year after reducing them by 100 last year, bringing the target range for the federal funds rate down to 3.50-3.75 per cent.
Five of the six central banks in the Gulf Co-operation Council bloc have moved in line with the Fed this year because of their currency pegs. Kuwait, whose dinar is tied to a basket of currencies, is the only exception.
Analysts do not expect a more dovish Fed to have a dramatic effect on the Gulf’s economic outlook, although short-term borrowing costs on credit cards, for example, could be cheaper. A weaker dollar could improve prospects in the UAE by supporting non-oil sectors such as aviation and tourism but could carry other risks.
“This linked question of the impact on the dollar is a really important one,” said Rachel Ziemba, founder of geopolitical risk firm Ziemba Insights.
Should the dollar weaken against Chinese and other Asian currencies, it could add to inflationary pressures.
“There’s a lot of appreciation pressure on the renminbi [Chinese yuan] that its central bank has been managing via allowing state banks to accumulate sizeable foreign currency and dollar holdings,” Ms Ziemba said. “And I mention this because the Gulf imports a lot more products from China.”
Fed on hold
Existing divisions within the Fed are centred around how to balance the central bank’s dual mandate – price stability and full employment – and officials have been considering which merits greater attention with a series of data showing those two goals are in tension.
“It’s a very challenging situation,” Mr Powell said after this month’s meeting. “I think we’re in a good place to wait and see how the economy evolves.”
Payroll job gains in the US have averaged 40,000 per month since April. But Mr Powell said the growth figure could be overstated by as much as 60,000 jobs per month, implying overall weakness in the labour market. Remarks from other policymakers suggest they too have little appetite for any further weakening.
“From the Fed’s perspective, that slowness in employment growth … makes them nervous and that’s why they bought insurance,” said Mr Reinhart.
“I think they probably bought as much insurance as they think is necessary, because insurance is costly, it makes it less likely they get down to their inflation goal as quickly as they want. And for now, they’re on hold.”
Meanwhile, inflation remains above the Fed’s 2 per cent target, which the central bank’s more hawkish members point to as evidence to be more cautious in further rate cuts.
And more economic uncertainty awaits the Fed next year, with continued changes to immigration, shifting trade tariff dynamics, AI adoption and Mr Trump’s pro-economic growth agenda, heading into the 2026 midterm elections.
Supreme Court in focus
The political dynamics within and outside the Fed could have as much of an impact on monetary policy as rate decisions themselves.
The new year will bring in a new corps of regional Fed presidents who serve rotating one-year terms on the rate-setting Federal Open Market Committee. Other voting members on the committee include the seven Fed governors and the New York Fed president.
One point of uncertainty recently resolved was the Fed board of governors voting unanimously to reappoint 11 of its 12 regional Fed bank presidents (the Atlanta Fed chief the lone exception because he had already announced plans to resign in February). This came after months of speculation that Mr Trump would seek to push for more control over the rate-setting committee by removing the regional bank presidents.
“I do think they’re trying to get ahead of what might be further political pressure,” Ms Ziemba said.
Another question yet to be answered is Mr Powell’s future. While his term as Fed chair expires in May, he still has the option to serve out his remaining two years as a governor on the Fed board. He has so far remained silent on his future.
Adding to the political drama are two historic decisions before the Supreme Court: one that will determine the legality of Mr Trump’s use of emergency tariffs, the other on the legality of firing a Fed governor.
“The Supreme Court has some very big, potentially world economy-altering decisions to make and it’s not clear what they will decide,” said Gary Richardson, first historian of the Federal Reserve system and now a professor at the University of California, Irvine.
Judges on the US high court expressed scepticism during arguments on the tariff case, questioning if Mr Trump overstepped the limits of his power by imposing universal duties on America’s trading partners.
Meanwhile, observers believe the Supreme Court has signalled through recent decisions that the quasi-private structure of the Fed is different from other independent agencies whose officials Mr Trump has moved to oust. That could protect Lisa Cook, the embattled Fed governor who is in litigation with the President. If Mr Trump were to be successful in firing her, it would give him the opportunity to appoint another official to serve out the remaining 13 years of her term.
“But we don’t know what the Supreme Court’s going to do. The Supreme Court has … substantially expanded presidential power over independent agencies, and the Fed is sort of the last independent agency standing,” Mr Richardson said.