Powell To Raise Rates in September. But There’s a Price to Pay in January.

It’s clear now that Federal Reserve Chair Jay Powell will cut interest rates 0.25% at the Fed meeting in late September. This puts Powell on a direct collision course with Donald Trump.

That rate cut will come just six weeks ahead of Election Day on November 5. It will probably give the stock market a boost (in many ways, the mere expectation of a rate cut has already boosted stocks following the August 5, 2024, mini-crash). In turn, this will boost the Democrats’ chances of winning the presidential election.

Trump has publicly said that Powell should not cut rates so close to the election and to do so should be regarded as a kind of election interference by the supposedly apolitical Fed. Powell may win this round using an economic slowdown and stock market volatility as cover. But if Trump wins the election, there may be a high price for Powell and the Fed to pay for this political rate cut.

In the first place, all seats on the Fed Board of Governors are selected by the President. Trump could nominate hard money allies like Judy Shelton, Larry Kudlow and Monica Crowley to fill those seats. It’s not clear Trump could fire Jay Powell (it’s possible but it has never been done before so the matter could be litigated) but Powell’s term as Chair is up on May 23, 2026, so Trump could replace him relatively early in his second term.

Trump could also seek legislation (assuming he wins and Republicans control both Houses of Congress) that could reduce Fed powers and their autonomy. This could include repealing the “dual mandate” that requires the Fed to target unemployment and inflation at the same time (impossible to do but the Fed goes through the motions). This would return the Fed to its original purpose of sound money and lender of last resort.

There’s a lot at stake if Powell goes ahead with his political rate cut. Investors should take heed. They may soon be dealing with a neutered Fed.

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