The fact that the US Federal Reserve and its Chairman Jerome Powell ar heading for a confrontation with Donald Trump should have become clear to the last observer after his usual brusque comments last week.

Trump not only blatantly criticized the interest rate policy course in the media, he also immediately denied Powell's expertise. «I think I know interest rates much better than they (the Fed) do, and I certainly know them much better than the person who is primarily responsible for that decision,» said the new US president. «I would like to see (interest rates) cut sharply.»

In contrast, Powell has consistently been highly reserved when asked about Trump. For instance, shortly after the November election, he responded to questions about his potential resignation and Trump’s ability to remove him with a simple «no».

Demonstrating Independence

And yet Trump's clearly formulated demands for lower interest rates are increasing the pressure. This is because Powell and the central bank must now demonstrate their independence to the public and the markets. It is doubtful that Powell will get away with monosyllabic answers on the new government's policy at today's press conference.

In recent months, the expectations of economists and financial markets with regard to further US interest rate cuts have fallen sharply. Inflation has not weakened as much as previously expected. The economy remains strong and the labor market shows no clear signs of weakening.

The consensus expectation for the year as a whole is that the key interest rate range will only be lowered by 50 basis points. Many economists believe no further cuts are likely, making any move at the January meeting a major surprise.

Reactively Follow the Data

It is expected that Powell and the Federal Open Market Committee will point out that decisions will continue to be made on the basis of data in future. The increasing uncertainties will also be an issue and serve as a justification for cautious and rather reactive action.

It is clear to all observers that inflation expectations for the coming months have become more difficult due to the Trump administration's plans. Deregulation, tax cuts, tariffs and other trade barriers as well as the mass deportation of undocumented migrants will pull the economy in different directions. It is hard to predict what effect Trump's squaring of the circle will ultimately have.

Powell is unlikely to predict future interest rate developments, as doing so is nearly impossible. This also makes it harder for him to provide clear monetary policy guidance to the markets. He is more likely to take on the role of the Sphinx: Silent, immobile and somewhat enigmatic.

Lightning Rod Function

Despite the new president’s bluster, Trump is well aware that Powell can serve as a crucial lightning rod for him. Independent central banks may be inconvenient, but they often become scapegoats for politicians.

An important lesson could also be learned from the misguided monetary policy in Turkey. The more President Recep Tayyip Erdoğan tampered with the central bank and set the couse, the more responsibility for negative consequences landed on his doorstep. This has undermined market confidence and fueled inflation.

Target for Good Advice

As long as Powell, who was appointed by Trump in his first term of office, acts as an independent spirit, he can continue to serve as a target for the president's «good advice». Every statement he makes in the direction of the Fed immediately lands as a reflex headline on all media channels. Whether or not this delivers even the slightest result is of secondary importance.

Powell successfully led the US economy to a so-called «soft landing» last year – he was able to slow down the rise in prices without triggering a recession.

Removing Powell before the end of his term of office in May 2026 is therefore unlikely to be a priority for Trump. The succession will be his responsibility again.