The ongoing dispute between Trump and the Federal Reserve has become one of the major themes driving the forex market in July. While differences between the two have been apparent for months, the tension has intensified significantly in recent weeks. There are three key reasons why Trump is now going after Fed Chair Jerome Powell. 

Rate Policy 

The Fed raised the federal funds rate from 0.25% to 5.50% during a tightening cycle that began in early 2022, just one year after President Biden took office. This cycle lasted until July 2023. The reason for the aggressive rate hikes was that the Fed initially believed inflation was temporary and feared that raising rates too early might derail the post-COVID recovery and trigger a recession. 

Why was inflation surging in the first place? One of the main causes was supply chain bottlenecks. The Fed’s role was to slow demand through monetary tightening, but the response came too late. Meanwhile, fiscal spending from both the Trump and Biden administrations to offset the effects of COVID was excessive. When combined with the Fed’s delayed action, what might have been a temporary inflation shock turned into a more persistent problem. 

Rates stayed at 5.50% until September 2024. That’s when the Fed began to shift course. A fast softening in the labor market caused concern. The Sahm Rule was triggered, signaling a possible recession due to a sharp rise in unemployment. Fearing it had overtightened, the Fed began cutting rates, starting with a 50 basis point cut, followed by two 25 basis point cuts and bringing the federal funds rate down to 4.50% by the December meeting. 

Trump argues that the Fed’s cuts were politically motivated, since they began just before the election and then paused. But if the cuts were politically driven, why continue easing in December? Rate cuts take time to impact the economy, usually with a lag of three months to a year. If the Fed intended to sway the election, it would have needed to begin cutting rates as early as March. Even then, the effect might have been too delayed to help. 

(Federal Funds Rate Upper Bound) 

But why Fed stop cutting in 2025? The Fed halted its rate-cutting cycle in 2025 because the spike in unemployment failed to trigger a recession, and the labor market quickly recovered. In addition, sharp changes in fiscal and trade policy significantly reduced the predictability of economic forecasts. 

Tariffs, by nature, are stagflationary, while stricter immigration policies may create a buffer against further spikes in unemployment. These factors gave the Fed valid reasons to pause and wait for more data before proceeding with additional cuts. 

By April, Trump revealed the full details of his new tariff policy. In the lead-up to the announcement, businesses and consumers had already started stockpiling future import needs.. However, once the new policy was made public, the Fed’s updated forecasts showed higher inflation ahead. That left little justification for further rate cuts. 

Some arguments still persist that slowing growth could help contain inflation and that tariff-driven inflation might be “temporary.” But can the Fed afford to risk another “temporary” inflation episode after what happened in 2022? Likely not. 

So far, the new tariff rules are being used as a bargaining tool and have been repeatedly delayed, meaning they are not yet fully in effect. This has limited their immediate impact on inflation combined with the frontloading of imports and delayed the expected rise in prices. Trump is frustrated by this. His view: why are rates still high while inflation is falling? 

The answer lies in how the Fed operates. It does not base decisions solely on current inflation but rather on forecasts and expectations. As mentioned earlier, the federal funds rate acts with a lag, so the Fed must look ahead when making policy choices. The risk of another inflation spike is far more dangerous than a mild recession. 

Moreover, the Financial Conditions Index shows that current monetary policy is not excessively tight, it may even be slightly accommodative. 

Looking ahead, inflation is likely to pick up again in the next 8 to 12 months due to lagging effects from tariffs. However, this resurgence will likely be mild. For that reason, the Fed will probably only begin cutting rates once policymakers are confident that inflation will stay within manageable levels. 

Our base case: one rate cut in 2025, followed by four or five more in 2026. 

(Bloomberg Financial Conditions Index) 

Political Reasons 

Trump is taking a major gamble with his tariff policy and wants to avoid triggering a recession in the process. Governments typically focus more on economic growth than inflation, as long as inflation remains within manageable levels. After all, strong growth is often the key to re-election. Tariffs are expected to slow growth, but Trump believes at least part of this policy is necessary for long-term fiscal and economic strategy. He wants to soften the blow by pushing for lower interest rates, but he has not received the support he hoped for from the Fed. 

Trump’s responsibility is to manage fiscal policy and support long-term economic expansion. Powell’s role, on the other hand, is to balance price stability and employment. These goals often conflict, as they do now. That’s exactly why central bank independence is crucial, to act as a counterweight to fiscal policy when needed. 

A similar situation played out in Turkey in recent years, where the government repeatedly replaced central bank governors in pursuit of low interest rates. The outcome was disastrous: inflation spiked to extreme levels, and years later, both rates and inflation remain well above where they started. Inflation expectations were pushed so high that returning to target levels became nearly impossible without causing a severe slowdown. This risk exists anywhere central bank independence is undermined. 

Another possible reason for Trump to pressure Powell might be to find a scapegoat. While this is speculative, it’s not uncommon for politicians to seek someone to blame when economic conditions worsen. Trump understands that his tariff policy carries recession risk. He likely also knows that even if someone like Bessent replaced Powell, the Fed board would not vote to cut rates unless justified by data. Quietly framing Powell as the reason for a future recession because he didn’t cut rates could help shift political blame. 

There’s also a structural incentive. While Powell’s term as Fed Chair ends in May 2026, his term as a Fed Board member extends to 2028. If Powell resigns from the board after his chair term ends, Trump would get an opportunity to appoint a new board member, potentially expanding his influence over Fed policy. 

Trade Policy – Yields 

One of Trump’s clear goals is to reduce the trade deficit. A weaker dollar helps by making exports more competitive and imports more expensive. The ongoing dispute with the Fed is putting downward pressure on the dollar. Interestingly, the increase in media and political focus on the Fed began just after the dollar index broke out of its downward trend. That timing may not be a coincidence. 

Regarding yields, it’s a common misconception that lower federal funds rates automatically mean lower yields. While short-term yields might fall, long-term yields often move in the opposite direction. If the Fed cuts rates prematurely, it can fuel inflation expectations and push 5-year and longer-dated yields higher. That, in turn, undermines the Fed’s credibility and weakens the effectiveness of monetary policy. 

Summary 

Trump wants a weaker dollar, higher growth, lower interest rates, a political scapegoat, and more control over the Fed. Pressuring Powell potentially helps achieve all of these goals. The risks? Higher inflation, rising long-term yields, and a loss of credibility for both the Fed and the U.S. dollar. 

In my view, Trump is unlikely to try to fire Powell directly, which would carry significant political and market risks. Instead, he will likely continue applying pressure to keep the dollar low. If Powell steps down from the Fed Board after his chair term ends, Trump would have a chance to appoint someone more aligned with his views, increasing his influence. 

If this scenario plays out, dollar strength could remain capped, likely staying below the 105 level for at least the 12 months assuming other conditions remain stable. Combined with the ongoing U.S.–EU trade negotiations, this dynamic may become one of the key drivers for the dollar for the rest of the year.