The Federal Reserve is widely expected to keep interest rates unchanged this week, with its policy meeting taking place amid mounting political and legal pressures. The backdrop includes a criminal investigation involving Fed Chair Jerome Powell, a developing effort by the Trump administration to remove Fed Governor Lisa Cook, and the anticipated nomination of Powell’s successor ahead of the end of his term in May.
Only three scheduled policy meetings remain in Powell’s eight-year tenure, but what is usually a smooth leadership transition has become increasingly fraught. Key questions now include whether Powell would remain on the Board of Governors under a new chair, whether the Supreme Court could allow Cook to become the first Fed governor dismissed by a president, and whether President Donald Trump’s nominee can convince the Senate that the central bank will retain its independence.
With so many issues unfolding at once, concerns over the Fed’s autonomy have taken center stage, pushing the monetary policy debate into the background. Even so, analysts generally believe the institution’s safeguards remain intact. Market-based inflation expectations and long-term U.S. bond yields have shown little sign of widespread anxiety over the Fed’s future direction.
“It’s impossible to separate the actions of the next Fed chair from the broader economic environment or their ability to influence other members of the Federal Open Market Committee,” said Tim Duy, chief U.S. economist at SGH Macro Advisors. He added that any future rate cuts would still require consensus among policymakers, regardless of political pressure.
Attention is now focused on Trump’s expected announcement of his nominee to succeed Powell. Potential candidates include Kevin Hassett, Fed Governor Christopher Waller, former Fed Governor Kevin Warsh, and BlackRock bond chief Rick Rieder. Trump has repeatedly criticized the Fed for not delivering the deep rate cuts he believes are needed to support economic growth.
Rates expected to remain on hold
The Fed’s two-day meeting concludes Wednesday, with policymakers expected to keep the benchmark rate within the 3.50%–3.75% range. No new economic projections are scheduled, and investors largely anticipate that further rate cuts will be delayed until June, potentially under new leadership.
Recent economic data has provided little urgency for a policy shift. While job growth has been modest, unemployment edged down to 4.4% in December amid solid consumer spending. Inflation has also remained sticky, with the Fed’s preferred Personal Consumption Expenditures index running at 2.8% in November, slightly above expectations.
Powell is due to hold his regular post-meeting press conference, though his remarks are expected to focus less on interest rates and more on developments since the last meeting. These include a Justice Department subpoena and the threat of a criminal investigation, which Powell publicly described as part of an effort to pressure the central bank into cutting rates.
A recent Supreme Court hearing on Trump’s attempt to dismiss Cook eased immediate fears of intervention, as justices appeared inclined to let her remain in place. However, the case underscored Trump’s stated desire to reshape the Fed’s leadership beyond the usual rotation of terms.
Currently, any new Fed chair nominee would require another Trump-appointed governor, Stephen Miran, to vacate his seat when his term expires. Powell could also remain on the board for up to two years after stepping down as chair, potentially playing a pivotal role in future decisions beyond monetary policy.
Speaking at the World Economic Forum in Davos, Trump acknowledged the uncertainty surrounding Powell’s future, noting that central bank leaders often “change once they get the job.” That independence, analysts say, is essential to maintaining credibility in monetary policy.
Outlook remains stable for now
While the administration argues that Cook’s alleged misstatements justify her removal, Supreme Court justices from across the ideological spectrum emphasized the importance of preserving the Fed’s independence. Similar concerns were raised globally after threats against Powell, prompting some Republican senators to say they would delay action on any new Fed nomination until investigations are resolved.
Despite the political noise, economists see the near-term outlook as relatively calm. With rates near what policymakers consider a neutral level and no clear signs of surging inflation or sharp job losses, the immediate economic picture appears stable.
Michael Pearce, chief U.S. economist at Oxford Economics, said the Fed is still expected to cut rates in June and September, ending the easing cycle with rates around 3%. However, he noted that more aggressive cuts would likely require a significant deterioration in labor market conditions, which currently appears unlikely.
