A More Trump-Influenced Fed: Not a Threat to Inflation

For quite some time, financial media outlets have been ramping up concerns about the independence of the Federal Reserve, almost as if trying to stir panic.

We’ve had a series of rehearsals leading up to this moment. Some have claimed the eventual demise of Fed independence. Remember when President Trump criticized Fed Chair Jerome Powell during his first term? The narrative quickly labeled it an unprecedented attack on the central bank, especially when Trump announced the firing of Fed Director Lisa Cook, who wasn’t likened to a significant figure at the time.

Now, we’re witnessing the height of media anxiety. With expectations that Kevin Hassett may take over from Powell, warnings from economists and experts about the Fed’s credibility are echoing. The idea is that Trump will appoint loyalists who will recklessly lower interest rates, sending inflation soaring and triggering a backlash in the bond market.

But here’s the catch: the bond market doesn’t seem to agree.

Joe Weisenthal from Bloomberg noted some peculiar observations in the data. No matter who Trump appoints, future measures suggest inflation expectations remain notably low. In particular, the five-year inflation expectation — predicting inflation five years ahead — is hovering near its post-election lows in 2024. Weisenthal highlights that despite the chatter about the Fed abandoning its inflation target, the charts don’t reflect any upheaval.

Englander, a macro strategist at Standard Chartered, was quoted by Weisenthal saying that while there might be doubts about Hassett’s credibility, these concerns haven’t yet surfaced in inflation breakeven data.

Data Indicates a Decline in Inflation Expectations

A recent study from the University of Michigan shows that consumer inflation expectations have dropped for four consecutive months. For the upcoming year, forecasts are at 4.1%, the lowest since January 2025. Furthermore, the five-year forecast fell to 3.2%, matching levels from that same time.

The New York Fed’s Consumer Expectations Survey also paints a rosy picture. November’s data revealed that median inflation expectations remained unchanged at 3.2% for the coming year and 3.0% for the next three to five years, showing surprising stability over recent months.

To add perspective, as of October, businesses predicted inflation would only hit 2.2% in the next year, down from a peak of 3.8% in April 2022 and nearly matching pre-pandemic averages of 2.0%.

These aren’t just abstract figures. They come from companies making budget decisions, consumers planning their spending, and traders managing substantial investments. There’s no widespread panic that a Trump-appointed Fed will abandon price stability.

Examining Market Reactions

This raises the question: Why aren’t markets more concerned about the Fed’s independence?

The discourse surrounding Fed independence often overlooks this: if markets are untroubled by Hassett’s potential appointment, it might indicate that traders have insights that traditional economic analysts do not. Perhaps they believe the consensus framework on inflation dynamics prior to 2025 was flawed.

Consider what experts have predicted in recent years, including assertions that tariffs would lead to rampant inflation. Contrary to predictions, the so-called inflation spike never occurred. University of Michigan’s research director recently mentioned that consumers’ fears about tariff-induced price hikes haven’t materialized. Maybe traders will recall this when listening to warnings about Hassett.

It’s also notable that the conventional belief was that reducing inflation would require a recession. The prevailing view in 2022 and 2023 suggested a labor market crisis was necessary to bring inflation down from 9% to 2%. Instead, inflation dropped sharply, while unemployment remained below 4%, debunking the model.

Confidence in Supply-Side Changes

Markets may also be reflecting confidence in Trump’s broader economic policies. Deregulation, increased energy production, and enhanced productivity could all contribute to lowering inflation through supply-side dynamics. If one believes that Trump’s policies will bolster production capacity, this might allow for a more lenient monetary policy without triggering inflation.

Stephen Millan, who briefly served at the Federal Reserve, recently argued that current policies are overly restrictive. He estimates that significant policy changes, particularly in immigration and fiscal strategies, have altered what is considered a neutral interest rate — something previous models may have overlooked.

Millian hypothesizes that current interest rates are more resistant to economic growth than commonly acknowledged. This connects to why inflation has cooled down faster than expected and why markets are seemingly unfazed by the prospect of Hassett’s interest rate cuts. Perhaps they believe Trump’s interpretation of the neutral interest rate is more on target than mainstream predictions that have not adequately adjusted to changes in governance.

I don’t think this indicates abandoning the 2% inflation goal. Rather, it suggests that various policies might help achieve that target. Hassett hinted at this view when suggesting that there’s sufficient leeway to reduce rates.

Deciphering Trump’s Inflation Stance

This narrative framing Fed independence as synonymous with “fighting inflation confidently” assumes the current Fed has effectively battled inflation — which is debatable.

After all, this is the same Fed that labeled inflation as “transitory” throughout 2021, misjudged the unemployment requirements needed to lower inflation, and consistently warned that tariffs would escalate inflation, only to face embarrassment when the data contradicted these warnings.

The market’s calm toward Hassett isn’t lackadaisical; it reflects a rational reassessment of beliefs. Could it be that traders think monetary policy is better handled by those aligned with Trump’s economic outlook rather than a committee that has struggled with inflation forecasting for some time?

Here’s the ironic twist: While many think Trump’s influence on the Fed will push inflation higher, history suggests otherwise. Under Biden, the Fed oversaw inflation rise to a 40-year high. He carefully shielded the Fed from pressure and retained Powell, initially appointed by Trump. The supposed independence of the Fed failed to keep policies tight enough and it potentially allowed for laxity to persist too long.

Furthermore, there’s little basis to claim that Trump would pursue an inflationary monetary path. He has experienced the severe political backlash that high inflation brought in the 2024 election cycle. Polls consistently show voters believe inflation is the foremost issue today. He’s unlikely to want his legacy defined by a resurgence of inflation.

The market seems to grasp this, even if critics and some in the financial media do not.