President Donald Trump stated that he currently has no plans to dismiss Federal Reserve Chair Jerome Powell. However, he left open the possibility of future action, as a Justice Department investigation into the Federal Reserve's $2.5 billion headquarters renovation and persistent inflation challenges complicate the outlook for potential interest rate cuts in 2026.
Summary of Key Points
- •Trump indicated that Powell will remain in his position "for now," but suggested that the ongoing Department of Justice investigation into the Fed's renovation project and Powell's testimony could potentially become grounds for removal, despite legal limitations on firing Fed governors.
- •Both wholesale and consumer inflation figures continue to exceed the Federal Reserve's 2% target. Core Producer Price Index (PPI) is near 3.5%, and core Consumer Price Index (CPI) stands at 2.6%. Economists anticipate the core Personal Consumption Expenditures (PCE) index to hover around 3%, which would likely delay any near-term interest rate reductions.
- •Federal Reserve officials are divided on the path forward. Some believe that tariff-driven inflation will subside and advocate for modest rate cuts. Others foresee as much as 150 basis points of easing in 2026. Minneapolis Fed President Neel Kashkari has cautioned against cutting interest rates too rapidly.
Trump and Powell's Ongoing Dispute
"I don’t have any plan to do that," Trump told Reuters in an interview published Wednesday. The president suggested that the outcome of the investigation could influence his decision, stating it is "too early" to determine if the findings might justify Powell's removal.
"Right now, we’re (in) a little bit of a holding pattern with him, and we’re going to determine what to do," Trump elaborated. "But I can’t get into it."
Federal law allows the president to remove Federal Reserve governors only for cause, not solely based on policy disagreements. This provision has drawn increased attention as the probe intensifies and Trump considers potential nominees for the Fed's next chair.
The Justice Department recently issued grand jury subpoenas to the Federal Reserve concerning its $2.5 billion headquarters renovation and Powell's congressional testimony regarding the project. Powell has asserted that the administration is using the investigation as a pretext to exert pressure on the central bank regarding its interest rate policies.
"This is about whether the Fed will be able to continue to set interest rates based on evidence and economic conditions — or whether instead monetary policy will be directed by political pressure or intimidation," Powell stated on Sunday.
Trump dismissed concerns raised by Republican lawmakers that the investigation is intended to influence rate policy. "I don’t care," the president responded when asked about GOP members who labeled the probe as politically motivated. "They should be loyal. That’s what I say."
Despite the ongoing controversy, Trump indicated his intention to nominate Powell's successor "over the next few weeks." Senator Thom Tillis, a retiring Republican on the Senate Banking Committee, has threatened to block Fed nominees until the investigation is concluded. Trump expressed positive views on two potential candidates: White House economic adviser Kevin Hassett and former Fed Governor Kevin Warsh, describing them as "very good."
Economic Indicators and Inflation Trends
The political developments coincide with new inflation data suggesting that the Federal Reserve is unlikely to cut interest rates in the immediate future. Data released by the Labor Department indicated that wholesale prices increased by 3% in November and 2.8% in October. These figures, which were delayed due to the recent government shutdown, were released together on Wednesday. Core wholesale prices, which exclude food, energy, and trade services, saw a 3.5% increase over the past year, marking the largest rise since March. Economists noted that upward revisions to September data contributed significantly to this reading.
Consumer inflation remained elevated in December, with the core Consumer Price Index (CPI) rising by 2.6% year-over-year. This rate matches the pace observed from September to November and continues to be above the Federal Reserve's 2% target. Based on the latest consumer and wholesale price data, Stephen Brown, an economist at Capital Economics, estimated that the Fed's preferred inflation measure, the core Personal Consumption Expenditures (PCE) index, could increase to 3%, up from an estimated 2.8% in recent months.
The Federal Reserve's most recent Beige Book report highlighted emerging cost pressures across the economy attributed to tariffs. According to the report, some businesses that initially absorbed these additional costs have begun passing them on to consumers. However, retailers and restaurants have reportedly remained hesitant to do so. Businesses anticipate that price growth will moderate later in the year but expect it to remain elevated overall. Eight of the Fed's 12 districts reported slight increases in economic activity in early January, with only one district noting a small decline.
Divergent Views Among Fed Officials
Federal Reserve officials are currently analyzing the inflation data and hold differing opinions on how quickly price pressures will ease. Anna Paulson, President of the Philadelphia Fed, stated that she expects tariff-driven goods inflation to dissipate by mid-year and believes there is a "decent chance" that three-month inflation will return to 2% by the end of the year. She anticipates "modest further adjustments" to interest rates later this year.
Fed Governor Stephen Miran projects a more aggressive stance, forecasting 150 basis points of rate cuts in 2026. This forecast significantly exceeds the median expectation of one 25-basis-point cut. Miran attributes this projection to a lower neutral rate and slower population growth, which he believes will lead to decreased inflation. Minneapolis Fed President Neel Kashkari expressed a more cautious outlook, acknowledging that inflation is declining but emphasizing that its future trajectory remains uncertain. He warned that reducing interest rates too quickly could inadvertently exacerbate inflationary pressures, particularly impacting lower-income households already facing financial strain from higher prices.
"Overall, the economy seems quite resilient," Kashkari commented. "That makes me question how tight policy is right now."
Market analysts widely expect the Federal Reserve to maintain current interest rates at its upcoming meeting on January 29-30. The central bank is anticipated to keep the target range between 3.5% and 3.75% as policymakers await clearer signals from both the economy and the White House.