Despite heightened political noise surrounding the Federal Reserve, we do not anticipate dramatic shifts in monetary policy – regardless of who is confirmed as the next chair. A Trump-appointed candidate would likely favor a faster return to a neutral policy stance than the current median view of the Federal Open Market Committee (FOMC). They may also support a more aggressive approach to balance sheet normalization, with an emphasis on gradually shifting the Fed’s holdings toward Treasury bills.
While Trump’s nominees for Fed chair would likely advocate for a faster pace of rate cuts, the administration’s optimistic growth forecasts limit the case for a policy stance below neutral or for adopting a much lower estimate of the neutral rate than the current FOMC consensus.
Furthermore, despite ongoing speculation, we believe it is highly unlikely that Trump will fire Fed Chair Jerome Powell before his term ends in May 2026. Firing Powell could be self-defeating in several respects, and besides, the legal, political, and economic ramifications loom too large. (For a more detailed analysis, see the article by my colleague and former Fed Vice Chair Richard Clarida in last month’s Economist, titled “The best check on Fed politicisation is fear of being judged a failure.”)
Overall, we believe a reasonable path forward given our economic outlook is a return to a neutral policy stance by the end of 2026, with interest rates settling near the midpoint of the Fed’s estimated neutral range of 2.6%–3.6% (down from the current level of 4.25%–4.5%). This is lower than the FOMC’s current 2026 Summary of Economic Projections median projection of 3.6%, but it remains within the central tendency range. So far, consumer price adjustments resulting from higher tariffs have been mild. If that trend continues, there is a strong case for the Powell-led FOMC to resume normalizing rates later this year.
Interest rates could reach neutral next year
Many investors are asking about the direction of Fed policy, particularly in light of Trump’s public dissatisfaction with recent decisions under Powell and next year’s expiration of key Fed appointments. In our view, economic fundamentals and institutional dynamics point to a baseline monetary policy outlook that is not meaningfully different from what would be expected with the current composition of FOMC participants – perhaps with a marginally faster return to a more neutral policy stance.
Amid the headlines surrounding Trump and Powell, recent economic data developments are strengthening the case for rate cuts. U.S. economic momentum has slowed compared to last year: Department of Commerce data show real consumption growth of approximately 1% in the first half of 2025, down significantly from the 4% pace recorded in the second half of last year. Inflationary pressures have also been milder than expected – partly because tariffs are taking time to filter through to consumer prices (see last week’s Macro Signposts, “The Economic Impact of U.S. Tariffs”). Some policymakers, including Fed Governor Christopher Waller, have made a case for an earlier move in July, while 10 FOMC participants expect two or more 25 basis-point cuts later this year.
The individuals speculated to be leading contenders to succeed Powell as Fed chair – including Waller, Kevin Hassett (Director of the National Economic Council), and Kevin Warsh (former Fed governor) – would likely advocate for faster and deeper rate cuts. Assuming sufficient consensus, the FOMC could potentially lower rates by 100 to 150 basis points (bps) from the current range of 4.25%– 4.5%.
However, this would not represent a radical departure from current policy; it’s at the lower end of current Fed estimates for the neutral rate. Thus, by cutting rates at a steady pace, the Fed under Powell could potentially reach neutral before a new chair is appointed. Much hinges on the Fed’s estimate of neutral – and whether a Trump-nominated chair would argue for a level below the current central tendency range of 2.6 to 3.6%. While supply-side expansion could help limit inflationary pressures, higher supply-side growth is typically associated with elevated investment, which tends to raise the neutral rate. If such growth materializes, it would be difficult to justify a policy rate significantly below the Fed’s estimated neutral range. In our view, the case for a much lower neutral rate appears inconsistent with the Trump administration’s optimistic growth projections. Both Hassett and Warsh have said that Trump’s tax and tariff policies could lift U.S. real GDP growth to around 3%.
Moreover, even if a Trump nominee pushes for a much faster return to neutral, the Fed, as always, makes policy decisions by committee. It would take more than one or two votes to sway policy dramatically away from a steady, measured return to neutral.
Why Fed Chair Powell will likely serve his full term
Despite persistent rumors and occasional threats from the president, we still believe it is highly unlikely that Trump will move to fire Powell before his term ends in May 2026. There are compelling legal, political, and practical reasons for this view.
- Legal constraints: The most significant barrier to removing Powell is legal. Earlier this year, the Supreme Court affirmed the Federal Reserve’s special status as a quasi-private institution, whose governors can only be removed for “cause” – a high threshold typically reserved for serious misconduct such as fraud. While some Republican lawmakers have tried to build a case for removal by pointing to cost overruns in the Fed’s building renovations, the Federal Reserve Board has quickly responded with reasonable rebuttals. Powell has also called for an independent Inspector General review and privately indicated that he would challenge any attempt to unseat him – likely remaining in his position while the matter is litigated. - Political realities: Even if Trump could legally remove Powell, doing so would be politically risky and likely counterproductive. All Fed nominees require Senate confirmation, starting with the Senate Banking Committee. Given the current political landscape, it could be difficult for Trump to secure unanimous support from Republican committee members, especially if the move is perceived as an attack on the Fed’s independence. In the committee, a single Republican vote in opposition could derail a nomination. Two GOP members of the Senate Banking Committee, Thom Tillis and John Kennedy, have said that firing Chair Powell should be avoided, with Tillis saying it would “undermine the credibility of the U.S.”. Like his predecessors, Trump – in his first administration – struggled to advance controversial Fed nominees, with several high-profile withdrawals and failed confirmations in recent years. - Economic and market consequences: Firing Powell could carry significant market risks. Past speculation about his potential removal has led to higher long-term interest rates and declines in equity markets – outcomes contrary to the administration’s goals. Leading economists and former Fed officials have warned that such a move could undermine confidence in the central bank, raise inflation expectations, and call into question the unique global status of U.S. capital markets. The likely consequences: steeper yield curves, higher rates, and a weaker dollar.
- Institutional checks: Finally, as noted above, it is important to remember that the Fed chair holds only one of 12 votes on the policy-setting FOMC. Even if Trump were to install a politically partisan chair, it is far from certain that the rest of the committee would support a dramatic shift in policy. It’s worth noting that of the current seven-member Fed Board of Governors – all of whom vote in the FOMC – only two were nominated during Trump’s first term, while the others were nominated by President Joe Biden.
Bottom line
Over the next few years, barring an unexpected negative economic shock or more concerning underlying inflationary pressures, we expect a steady return to a neutral monetary policy stance – first under Powell’s leadership through May, and then under the next Fed chair. Fed independence, combined with economic fundamentals and institutional checks, supports this baseline outlook.
In the near term, while Trump is likely to continue criticizing the Fed and advocating for lower rates, we do not expect him to attempt to fire Powell. Instead, Trump will begin shaping the Fed through upcoming appointments, beginning with the expiration of Governor Adriana Kugler’s term in January and Powell’s chairmanship in May (Powell’s term as governor, distinct from his role as chair, runs through January 2028).
Whoever Trump chooses as next chair will, like any Fed leader, have to present a credible case for monetary policy decisions that garners Senate confirmation first and then a majority FOMC support. As with other institutions of the U.S. governing system, the Fed is structured with built-in checks and balances that limit the ability of any single individual to dramatically shift its policy trajectory.
