Trump says he has “no plan” to fire Powell, but leaves the door open as a Justice Department investigation into the $2.5 billion renovation of the Fed’s headquarters and persistent inflation complicate the path to rate cuts in 2026.
Summary
- Trump signals Powell is staying “for now,” suggesting the DOJ investigation into the Fed renovation and testimony could become grounds for removal despite legal restrictions on firing governors.
- Wholesale and consumer inflation remains above the 2% target, with a core PPI near 3.5% and a core CPI of 2.6%, leading economists to expect a core PCE of around 3% and delaying cuts in the near term.
- Fed officials are divided, with some seeing rate-driven inflation fading and calling for modest cuts, others calling for an easing to 150 basis points by 2026, while Kashkari warns against cutting spending too quickly.
President Donald Trump said he currently has no plans to fire Fed Chairman Jerome Powell, despite an ongoing Justice Department investigation into the renovation of the central bank’s headquarters and mounting political pressure surrounding the Fed’s interest rate decisions.
Trump and Powell continue to argue
“I don’t have any plan to do that,” Trump told Reuters in an interview published Wednesday. The president indicated the investigation could change his position and said it is “too early” to determine whether the findings could prompt Powell’s removal.
“Right now we’re kind of in a holding pattern with him, and we’re going to determine what to do,” Trump said. “But I can’t get in.”
Federal law only allows the president to fire Federal Reserve governors not over policy disagreements, a provision that has come under renewed scrutiny as the investigation intensifies and Trump considers who to nominate as the Fed’s next chairman.
The Justice Department recently served the Federal Reserve with grand jury subpoenas related to the $2.5 billion renovation of its headquarters and Powell’s testimony in Congress on the project. Powell has accused the government of using the investigation as a pretext to pressure the central bank over interest rate policy.
“This is about whether the Fed will be able to continue setting interest rates based on evidence and economic conditions – or whether monetary policy will instead be guided by political pressure or intimidation,” Powell said on Sunday.
Trump dismissed Republican concerns that the investigation is intended to influence interest rate policy. “I don’t care,” the president said when asked about Republican lawmakers calling the investigation politically motivated. “They have to be loyal. That’s what I’m saying.”
Despite the controversy, Trump said he plans to nominate Powell’s successor “in the coming weeks,” even as Senator Thom Tillis, a retiring Republican on the Senate Banking Committee, has threatened to block Fed nominees until the investigation is completed. Trump praised two potential candidates, White House economic adviser Kevin Hassett and former Fed Governor Kevin Warsh, calling them “very good.”
The political unrest comes as new inflation data shows the Fed is unlikely to cut rates anytime soon. Labor Department data shows wholesale prices rose 3% in November and 2.8% in October. These numbers were delayed by the recent government shutdown and were released on Wednesday. Core wholesale prices, which exclude food, energy and trade services, have risen 3.5% over the past year, the strongest increase since March. Economists noted that the figures were largely due to upward revisions to September figures.
Consumer inflation remained high in December, with the core consumer price index rising 2.6% year over year, similar to the pace from September to November and remaining above the Fed’s 2% target. Based on the latest data on consumer and wholesale prices, Capital Economics economist Stephen Brown estimated that the Fed’s preferred inflation gauge, the core index for personal consumption expenditures, could rise to 3%, up from an estimated 2.8% in recent months.
The Fed’s latest Beige Book report shows that rate-related cost pressures are emerging across the economy. Some businesses that initially absorbed the extra costs have begun passing them on to customers, although retailers and restaurants remain reluctant, according to the report. Companies expect price growth to moderate later this year but remain high overall. Eight of the Fed’s 12 districts reported a slight increase in activity in early January, while only one district recorded a small decline.
Fed officials are analyzing inflation data and differing on how quickly price pressures will ease. Philadelphia Fed President Anna Paulson said she expects tariff-driven goods inflation to ease by mid-year and sees a “decent chance” that three-month inflation will fall to 2% by the end of the year. She expects “modest further adjustments” to interest rates later this year.
Fed Governor Stephen Miran is predicting a more aggressive policy, predicting rate cuts of 150 basis points in 2026, well above the average expectation of one 25 basis point cut. He argues that lower neutral interest rates and slower population growth will dampen inflation. Minneapolis Fed President Neel Kashkari was more cautious, saying inflation is slowing but its trajectory remains uncertain. He warned that cutting rates too quickly could inadvertently worsen inflationary pressures, especially for lower-income households already squeezed by higher prices.
“Overall, the economy seems quite resilient,” Kashkari said. “That makes me wonder how strict the policy is at the moment.”
The Fed is widely expected to hold rates steady at its Jan. 29-30 meeting, maintaining the current range of 3.5% to 3.75% as policymakers wait for clearer signals from both the economy and the White House, market analysts said.
