‘Afraid of his own shadow’: The split that could finally take down Trump’s old enemy

There’s a split opening up among the Federal Reserve Board’s governors at a delicate moment for the central bank, with two Trump-appointed governors saying they are open to a cut in US interest rates as early as next month.

Coming less than a week after the Fed’s rate-setting Open Market Committee decided to leave its policy rate unchanged, and against the backdrop of Donald Trump’s increasingly personal verbal assaults on the Fed chair, Jerome Powell, the comments by the Fed’s vice chair, Michelle Bowman, and fellow governor Christopher Waller, can only add to the pressure on Powell when he appears before Congressional committees this week.

Fed chair Jerome Powell has been a frequent target of Donald Trump. Credit: Bloomberg

Powell has been consistent in saying that the Fed is under no pressure to act on rates, with the economy performing reasonably solidly, unemployment low and inflation still above the Fed’s target rate.

He’s also highlighted the uncertainty over the impact of Trump’s tariffs and what they might mean for inflation, saying the pass-through of the costs of the tariffs was hard to predict but that someone – manufacturers, importers, exporters, retailers or consumers – will pay for them.

Last week the Fed effectively adopted a “wait and see” mode.

The effects of the tariffs that are in place – the 10 per cent baseline tariff on all imports and some targeted tariffs on commodities and products – are yet to show up in inflation data but the “big ones” – Trump’s “reciprocal” tariffs – won’t be announced until July 9 and therefore their impact won’t show up in the data for some time, potentially months, after their introduction.

That stance, given that the scale of the tariffs, their eventual impact on the inflation rate and the longevity of that impact is a known unknown, might appear sensible, but it has drawn increasingly aggressive criticism from Trump, most of it targeted very directly at Powell.

Indeed, Powell is increasingly being targeted, not just by Trump, but the wider administration.

Last week, Commerce Secretary Howard Lutnick said Powell was “obviously afraid of his own shadow”.

“These high interest rates make no sense. Enough is enough,” he posted on X.

US President Donald Trump has called for Powell to cut rates. Credit: Bloomberg

Vice President JD Vance described the Fed’s decision to keep rates on hold as “monetary malpractice” while the White House economic adviser, Kevin Hassett, said this week that he saw no reason for the Fed not to cut rates right now.

Bowman and Waller have joined the chorus of voices arguing for an immediate rate cut.

Bowman said she would support a cut as soon as next month, as recent data hadn’t shown any clear signs of material impacts from the tariffs.

The trade war might take longer, be more delayed and have a smaller effect on inflation than initially expected, she said.

“Ongoing progress on trade and tariff negotiations has led to an economic environment that is now demonstrably less risky,” she said.

“As we think about the path forward, it is time to consider adjusting the policy rate.

“Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting in order to bring it closer to its neutral setting and to sustain a healthy labour market.”

Christopher Waller is a leading contender to replace Powell. Credit: AP

Waller is of the same view.

“I don’t think we need to wait much longer because, even if the tariffs come in later, the impacts are still the same,” Waller said last week.

“It should be a one-off level effect and not cause persistent inflation.”

There is a broad consensus that the tariffs inflationary impacts will be transitory; a one-off price shock that raises costs for US companies and prices for US consumers, but whose effects then stabilise at the higher levels.

The unknowns, however, are how significant those effects are and how long the transition might be. The punitive reciprocal tariffs could, for instance, generate significant and lasting supply chain shocks.

The Fed hasn’t forgotten the big mistake it (and most central banks) made during the pandemic, when it thought the inflationary effects of the disruptions to global supply chains would be transitory. Instead, the inflation rate soared and the Fed was forced to raise US rates sharply.

That’s why Powell is adopting a conservative, data-driven approach to the potential inflationary impacts of Trump’s tariffs.

At this moment, the Fed has no data to suggest what those impacts might be and is unlikely to have that data to hand until much later this year – but is aware that the risks of cutting rates prematurely are likely to be greater than the risks of leaving them on hold.

Bowman, in 2018, and Waller, in 2020, were both appointed to the Fed by Trump in his first term, with Bowman elevated to vice chair earlier this month. That position carries with it responsibility for bank supervision, with Bowman expected to oversee some deregulation of US banks, in line with the administration’s deregulatory agenda.

Michelle Bowman, the Federal Reserve’s vice chair.Credit: Bloomberg

The willingness of Bowman and Waller to support Trump’s call for rate cuts comes at a key moment for the Fed.

Powell’s term as chair (but not as a governor) ends in May next year and Trump is expected to announce his successor before the end of this year.

Among those touted as potential chairs are former Fed governor Kevin Warsh, US Treasury Secretary Scott Bessent ... and Waller. Bowman might also be in the frame.

Trump would obviously look favourably on those candidates that support his conviction that US rates are too high, although his opinion is framed on a misunderstanding of how tariffs work.

The Fed hasn’t forgotten the big mistake it (and most central banks) made during the pandemic, when it thought the inflationary effects of the disruptions to global supply chains would be transitory.

He thinks they are paid for by the companies exporting their products to the US. Few, if any, economists would share that belief. Tariffs are paid by the US importer, with their costs potentially shared between the companies and their customers. They are inflationary.

In any event, Trump has made no secret of his desire to have greater influence over the Fed, even posing the question of whether he can appoint himself to the board. He will want to appoint someone he believes will do what he has always advocated and slash US rates.

The chair of the Fed is a powerful role, leading the world’s most influential central bank, but the moment Trump announces a successor Powell’s status will start to diminish as the focus shifts towards the views of the incoming chair.

An obviously partisan appointment would not just undermine Powell but would also damage perceptions of the Fed’s independence, which is fundamental to its credibility and the trust within financial markets and the business community that it is acting only to pursue its dual mandate of ensuring price stability and maximising employment – that it is apolitical.

There is, however, a twist. Trump could put someone beholden to him in the chair, but the decision-making body within the Fed is the Open Market Committee, whose chair is elected by its 12 voting members.

It is conceivable, albeit perhaps unlikely, that Powell, who can remain a governor until February 2028, could still lead the committee beyond the end of his term as chair in May next year if its members don’t trust the new Fed chair to keep their distance from the White House.

That would almost inevitably embroil the Fed in an unprecedented and even more destabilising confrontation with Trump.

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