As pressure from Donald Trump on the Fed intensifies, in which direction will key interest rates move? Several banks offer their perspectives, while the Treasury Secretary expresses concern about the situation.
Which way will Fed rates go?
On Monday, we reported on the subpoena received by the U.S. Federal Reserve (Fed), marking a new turning point in the disagreements between Donald Trump and Jerome Powell over key interest rates.
At the last FOMC meeting in December, the Fed decided to cut rates by 25 basis points, bringing them to a range of 3.5% to 3.75%.
For the January 28 meeting, the CME Group’s FedWatch tool suggests a 95% probability that rates will remain at current levels, compared with a 5% probability of a 25-basis-point cut:
Interest rate forecasts for the Fed’s next decision
In a note released last Friday, JPMorgan—which had previously expected a rate cut early this month—now believes the Fed will not cut rates this year, even with a new chair at the helm of the central bank:
If the labor market weakens again in the coming months, or if inflation falls significantly, the Fed could still ease its monetary policy later this year. However, we expect the labor market to tighten by the second quarter and for disinflation to proceed fairly gradually.
In fact, the bank even goes so far as to anticipate a 25-basis-point increase in those interest rates in the third quarter of next year.
For their part, Goldman Sachs analysts are forecasting a 25-basis-point cut for September, while those at Barclays are considering a similar scenario for December.
As a reminder, the COVID-19 pandemic led to a period of abnormally low rates, after which they soared to 5.5%, before gradually declining starting in September 2024:
Changes in U.S. Key Interest Rates
While Donald Trump regularly calls for rate cuts, Treasury Secretary Scott Bessent has nevertheless criticized the criminal investigation now targeting the Fed chair. According to comments reported to CNN by a source familiar with the matter, Scott Bessent is reportedly concerned that this case could have a negative impact on financial markets and that Jerome Powell’s potential dismissal could trigger increased volatility.
For now, this scenario does not appear to be materializing, judging by the S&P 500, which once again set a new record during Monday’s trading session.
For her part, U.S. Attorney for the District of Columbia Jeanine Ferris Pirro stated on X that “the word ‘indictment’ came from Mr. Powell’s mouth, and no one else’s” and that this subpoena would not have been issued if he had responded to previous requests:
The U.S. Attorney’s Office contacted the Federal Reserve on several occasions to discuss cost overruns and the chairman’s testimony before Congress, but its requests were ignored, necessitating legal action—which does not constitute a threat.
In this case, the renovation work on the Federal Reserve’s headquarters—which is at the heart of this subpoena—is reportedly estimated to cost $2.5 billion.
