①In 2025, the Federal Reserve navigated a complex economic and political environment by shifting its monetary policy from combating inflation to promoting stable growth. The Fed cut interest rates three times throughout the year in September, October, and December, lowering the federal funds rate range to between 3.75% and 4.00%. ②The “overt and covert struggles” between Trump and Federal Reserve Chair Powell became an underlying theme throughout the year, raising concerns about threats to the central bank's independence.
Cailian Press, December 24 (Edited by Huang Junzhi) In 2025, the Federal Reserve delivered a controversial yet resilient performance amidst a challenging economic and political landscape. This year, the tone of Fed’s monetary policy shifted from fighting inflation to ensuring stable growth, while debates over its independence formed a subtle but persistent backdrop.
Three Rate Cuts Amid 'Delicate Balancing'
Over the past year, the Fed faced conflicting objectives in achieving its dual mandate of “maximum employment” and “price stability”—a situation not seen since the stagflation period of the 1970s. This predicament led to divisions within the Fed not witnessed in years, as evidenced by starkly opposing views on interest rate policy.
As anticipated at the beginning of the year, the biggest “wild card” this year came from Trump—particularly his tariff policies. Initially, many Fed officials believed that tariffs would only lead to a one-time price increase and would not evolve into long-term inflation. However, on April 2, Trump unleashed a “bombshell” with the introduction of the “Liberation Day Tariffs,” prompting more officials to worry that tariffs might cause more persistent inflation.
Fed officials spent the summer months monitoring and evaluating the situation. As a result, for the first eight months of the year, the Fed remained on hold, adopting a “wait-and-see” approach while assessing the impact of Trump’s tariffs and other policy adjustments on the economy.
By September, the Fed finally announced its first rate cut of the year amid a difficult balancing act (weakening labor market, high inflation still persisting). Shortly thereafter, it cut rates again by 25 basis points at the end of October.
The fall also saw the longest government shutdown in history, forcing the central bank to make critical interest rate decisions without access to official government data. Officials had to rely on private sector data, which provided substantial information about the labor market but lacked data on inflation and prices.
By December, divisions within the Fed became even more apparent. Although it ultimately announced another 25-basis-point rate cut, bringing the federal funds rate range to between 3.50% and 4.75%, two voting members dissented: Chicago Fed President Goolsbee and Kansas City Fed President Schmid both voted against the decision due to inflation concerns and preferred to keep rates unchanged. Milan also dissented, favoring a 50-basis-point cut. Additionally, six members indicated on the dot plot that they did not support a rate cut.
Throughout the year, despite ongoing discussions about inflationary pressures caused by tariffs, their impact appeared milder than expected. Some Fed officials, including Powell and Waller, projected that tariff-driven inflation would peak in the first quarter of next year before beginning to decline. However, others, such as Cleveland Fed President Hamak and Dallas Fed President Logan (both of whom will become voting members next year), expressed concerns that inflation could remain persistently high and stay elevated over the long term.
Trump's Direct Challenge to Independence
The most compelling drama of the year has undoubtedly been the 'open yet covert struggle' between Trump and the Federal Reserve, or more precisely, between Trump and Chairman Powell. Trump and his senior advisors have consistently urged Federal Reserve Chairman Jerome Powell to cut interest rates swiftly and substantially, but the results have clearly not met their expectations. Trump has repeatedly criticized Powell in public forums and even threatened to dismiss him.
Nevertheless, Trump ultimately refrained from taking action, possibly due to a subtle connection with a ruling by the U.S. Supreme Court. In May this year, the Supreme Court strongly signaled that members of the Federal Reserve Board would receive special protections against dismissal by the president. The court emphasized that the Federal Reserve holds a unique position among government agencies.
Although the ruling does not explicitly prohibit Trump or any other president from dismissing members of the Federal Reserve Board, it indicates that any such attempt by the president would face strong resistance from the current justices of the Supreme Court.
Regardless, the threat to dismiss Powell over policy disagreements ultimately raised concerns about the erosion of central bank independence, leading to market volatility. While Trump did not follow through on dismissing Powell, he did remove Federal Reserve Governor Lisa Cook on allegations of mortgage fraud—a case still under judicial review, with the Supreme Court set to hear arguments early next year.
In an effort to extend his influence into the Federal Reserve, Trump went to great lengths. Coincidentally, Fed Governor Adriana Kugler unexpectedly resigned in August, providing Trump with an opportunity to nominate his confidant Stephen Moore to fill the vacancy, with the term ending on January 31, 2026. Moore did not resign from his White House role but instead temporarily stepped away from his duties.
Stephen Moore served as an economic policy advisor at the Treasury Department during 'Trump 1.0' and later became the chairman of the White House Council of Economic Advisers during Trump’s second term. He was also a senior strategist at the capital management firm Hudson Bay Capital Management. Moore is regarded as one of the 'architects' of Trump's tariff policies and a key designer of his economic agenda.
On the other hand, Powell’s term as Federal Reserve Chairman will conclude on May 15, 2026, meaning that next year will mark the first leadership transition at the Fed in eight years.
News regarding the selection of his 'successor' dominated headlines towards the end of the year. Recently, Trump indicated he had already decided on Powell's replacement and would announce the nomination early next year. Kevin Hassett, Director of the White House National Economic Council, and former Federal Reserve Governor Kevin Warsh are considered the frontrunners to succeed Powell.
On December 23 local time, Trump once again sent a clear message to the markets: I only want a 'compliant' Federal Reserve Chairman.
"I hope my new Federal Reserve Chair will cut interest rates when the market performs well, rather than disrupting it without reason," he posted on his self-created social media platform "Truth Social": "Anyone who does not agree with me will never become the Fed Chair!"
The 'contradictory' situation continues.
Analysts widely expect that the current 'contradictory' situation at the Federal Reserve will persist until 2026.
Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, pointed out that Federal Reserve Chair Jerome Powell successfully coordinated internal disagreements three times this year to ultimately reach a consensus on rate cuts. However, if inflation remains stubbornly high and the job market stays weak, achieving consensus for the next chair may prove even more challenging.
"While the possibility of further rate cuts in the future remains significant, we also see a risk scenario where the next chair might face a committee considering raising rates," he noted.
Added Ian Wyatt, Chief Economist at Huntington Bank: "Coordinating opinions and reaching consensus under such circumstances will be an arduous task for the new chair, especially when some views differ significantly from those of half of the regional bank presidents."
What lies ahead for next year?
Looking ahead to 2026, the mainstream view among Federal Reserve officials in the latest dot plot is that there will likely only be one more rate cut. Although the labor market is cooling, they do not consider this weakness an emergency. Meanwhile, inflation remains above the 2% target, and officials anticipate that economic growth will pick up next year, driven by the fiscal boost from the 'big and beautiful' tax reform bill and recovery from the shutdown.
Jeffrey Roach, Chief Economist at LPL Financial, stated that he expects some volatility in inflation data in the coming months, but inflation will decline next year, paving the way for further rate cuts.
Esther George, former President of the Federal Reserve Bank of Kansas City, projected that the unemployment rate will stabilize next year but remain at elevated levels; faced with substantial fiscal deficit spending, ongoing questions about the Fed's independence, and accommodative financial conditions, inflation will stay high.
"Given the forced interruption of official data releases, the Federal Open Market Committee may proceed cautiously but is still likely to reduce interest rates in 2026, as it views these cuts as aligning the policy rate toward a neutral stance," he added.
Cleveland Fed President Beth Hammack stated a few days ago that, following three consecutive rate cuts by the Federal Reserve, she sees no need to adjust U.S. interest rates in the coming months; Boston Fed President Susan Collins has also hinted at a pause in rate cuts next year, specifically noting, "It is important to me that the forward guidance in the committee’s statement echoes the language in the statement issued in December 2024, which was released prior to the pause in rate cuts."
Of course, "Trump-aligned" officials, including the new chairperson who will take office next year, are highly likely to advocate for continued significant rate cuts.
On Wall Street, JPMorgan anticipates that the Federal Reserve will cut rates only once next year, in January; UBS Global Wealth Management similarly predicts a single rate cut by the Fed next year, occurring in the first quarter. Strategists at Goldman Sachs, Wells Fargo & Co, and Barclays believe that the Federal Reserve will cut rates twice next year, with possible rate cuts in March and June. Additionally, both Standard Chartered Bank and HSBC Securities expect that the Federal Reserve will not cut rates next year.
In summary, the Federal Reserve in 2025 resembles a tightrope walker—tasked with repairing the lagging damage caused by high interest rates while safeguarding the central bank’s credibility amid political turbulence. And by 2026, what challenges will the Federal Reserve face? What surprises might Trump have in store? We shall wait and see.
Editor /rice