As 2025 developed we saw quite a turf war develop between US President Trump and the US Federal Reserve. In essence President Trump wants lower interest-rates than the Federal Reserve under Chair Jerome Powell is willing to provide. For example we looked at this on the 24th of June last year.
Too Late” Jerome Powell, of the Fed, will be in Congress today in order to explain, among other things, why he is refusing to lower the Rate. Europe has had 10 cuts, we have had ZERO. No inflation, great economy – We should be at least two to three points lower. Would save the USA 800 Billion Dollars Per Year, plus. What a difference this would make. (@realDonaldTrump)
That particular post in fact showed a ramping up of the Presidential demands.
There is quite a bit going on here but we have seen quite a progression in the demands by President Trump. We started with calls for a 1% cut in interest-rates and now maybe even a 3% cut which would take interest-rates towards 1% would not satisfy him.
At that point he was zeroing in on an expectation of cheaper US borrowing costs if he got his way. Care is needed here because as I point out regularly 2025 saw shifts in the yield curve which disappointed fans of this economic orthodoxy. Also linking to the Euro area with its lower economic growth and inflation was flawed.
Also the attacks became rather personal.
I hope Congress really works this very dumb, hardheaded person, over. We will be paying for his incompetence for many years to come.
The Federal Reserve cuts interest-rates
We did get a response but there was a problem as I pointed out on the 18th of September.
For the third time in his tenure, Powell is attempting the delicate maneuver of cutting rates not because a recession appears imminent, but rather to prevent one.
Those we the words of the Nick Timiraos who has a direct line to Federal Reserve Chair Jerome Powell. As you can see there was no mention of inflation at all but an appearance of a recession bogeyman. This did not fit at all well with the official data.
Real gross domestic product (GDP) increased at an annual rate of 4.3 percent in the third quarter of 2025 (July, August, and September), according to the initial estimate released by the U.S. Bureau of Economic Analysis. In the second quarter, real GDP increased 3.8 percent.
If we bring things as up to date as we can we see this from the Atlanta Federal Reserve.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2025 is 5.1 percent on January 9, down from 5.4 percent on January 8.
Thus rather than a recession we are seeing strong economic growth which frankly justifies neither the September nor the December interest-rate cuts that we saw. It has left me wondering if at some point Jerome Powell will have Luther Vandross on his headphones.
I told my girl bye-bye (Bye)
But I really didn’t mean it
Said I met somebody new so fine (Fine)
But I really didn’t mean it.
Also ta this point we have both sides being wrong. Because if we have what President Trump would call a “great” economy why do you need any interest-rate cuts? Also it rather detonates the comparison with the ECB when we see quarterly growth in the US looking like annual growth in the Euro area.
Video killed the Radio Star
So to say there were tensions were an understatement and yesterday saw a further ramping up of the heat. The Federal Reserve released a video of Federal Reserve Chair Jerome Powell saying this.
On Friday, the Department of Justice served the Federal Reserve with grand jury subpoenas, threatening a criminal indictment related to my testimony before the Senate Banking Committee last June. That testimony concerned in part a multi-year project to renovate historic Federal Reserve office buildings.
The specifics here are something of a sub-plot as in the Presidential campaign against the Federal Reserve covered appointing policy lackeys and pressure to deselect one particular policymaker on the issue of mortgage fraud. But we have the fundamental issue of one part of US government accusing another of criminal activity. This poses even more problems for the issue of independence as just as the Federal Reserve begins to do as it is told it ends up here anyway.
But this unprecedented action should be seen in the broader context of the administration’s threats and ongoing pressure.
As to this part it is partly true.
The threat of criminal charges is a consequence of the Federal Reserve setting interest rates based on our best assessment of what will serve the public, rather than following the preferences of the President.
The bit about the President is true as I have been explaining for some months his efforts to influence and indeed direct the Federal Reserve. But I am much less convinced by the claim that the Federal Reserve uses this as its criteria.
what will serve the public
Whereas back on September 18th 2024 I pointed out this.
So a total of 0.5% is expected in 2024 and due to the election it seems logical to do that in December. But I seem to be rather alone in arguing for the point that central banks should avoid making moves at election time.
In a way the political point was made even more strongly by the words of Paul Krugman.in the New York Times.
I would like to see the Fed cut by 200, 250, 300 basis points quite quickly, right away, with rhetoric that makes it clear that this is just the beginning.
That would have been a disastrous policy if implemented and could not be much more political.
Returning to yesterday the statement ended with this.
Public service sometimes requires standing firm in the face of threats. I will continue to do the job the Senate confirmed me to do, with integrity and a commitment to serving the American people.
Comment
In an increasingly polar world I expect the media to take sides. But as so often the issues are nuanced. President Trump is wrong to call for interest-rate cuts and taking the Federal Reserve to court over another issue is an attempt to bully it. But the Federal Reserve broke one of the rules of central banking about not interfering with elections with its September 2024 interest-rate cut. It is hard not to have a wry smile at the way the Fed and President Trump have switched sides on interest-rates since then. Both have played politics here. Both are losing.
If we switch to financial markets then equities and bonds are quiet, Yes we have seen a dip in the S&P 500 but we are very near to all-time highs. Bond yields have nudged higher but that was often the story before! Precious metals have risen again with Gold reaching US $4600 and Silver US $84 so well played if you hold them as things could hardly have gone much better.
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