The Fed struggles to balance Trump’s demands with economic reality
Since his special address to the World Economic Forum in January 2025, US President Donald Trump has pressed the Federal Reserve to cut interest rates. So far, rates have held steady, while inflation remains above the Fed’s 2 percent target and it hedges against the potentially inflationary effects of Trump’s tariffs.
Still, the Fed faces significant political pressure from the White House, in part reflecting the president’s frustration with an economy that’s weaker than the one he inherited in his first term. In 2017, inflation, unemployment, and interest rates were all lower than today’s projections for 2025. In fact, Trump’s first year in office brought lower inflation and unemployment than the first year of any US president since 1977.
Balancing “maximum employment” and price stability
For the Fed, Trump’s push for lower rates is particularly challenging, because—unlike most other central banks—it operates under a dual mandate. It has a legally binding obligation to achieve both price stability and maximum employment, understood as the highest level of employment the economy can sustain without incurring unwanted inflation. For the United States, that generally means 4 to 5 percent unemployment, with a target of 2 percent inflation.
This unique mandate could put the Fed in an even tougher spot in the coming months. Currently, the employment component of the mandate is allowing it to lower rates sooner than previously expected. At Jackson Hole last month, Federal Reserve Chair Jerome Powell hinted at a September rate cut, citing a “slowing in both the supply and demand for workers.” However, if unemployment and inflation continue to rise—which some economists warn may happen due to trade wars—the Fed will have to balance the job market, price stability, and mounting political pressure.
Labor market signals complicate the Fed’s decisions
Congress added the maximum-employment mandate to the Federal Reserve Act in 1977—a move prompted by the painful economic lessons of stagflation. A year later, President Jimmy Carter signed the Humphrey-Hawkins Act, which reinforced the goal of full employment.
At the beginning of September, the Bureau of Labor Statistics (BLS) released its first jobs report since the firing of its former commissioner, Erika McEntarfer. The White House had dismissed her over what it called unfavorable numbers, with Trump openly questioning the reliability of BLS data. The report showed that in August, nonfarm payrolls grew by only 22,000 jobs, far short of the 75,000 projected, underscoring the fragility of the job market. This shortfall has fueled expectations of a rate cut of at least 25 basis points at the Fed’s September 17 meeting. Meanwhile, Trump has kept the pressure on, calling for Powell to make a bigger cut—even though inflation rose to 2.9 percent in August.
While inflation and job loss loom, Trump wants it all
The US economy now faces the risk of both rising unemployment and higher inflation—precisely when the Fed must make some of its toughest monetary-policy calls.
Meanwhile, Trump wants it all. Frustrated by the latest inflation and employment data, he wants low inflation, low interest rates, and a booming job market. These conditions were briefly present during his first term, but most presidents have faced a Fed forced to make trade-offs. The slowing job market is going to prompt a rate cut this week, giving Trump his desired interest-rate outcome, but that will not change the underlying data. Bloomberg’s consensus projection sees US inflation remaining well above the 2 percent target until 2027, partly because of how tariffs will be passed through to consumer prices. If that trend continues, the Fed could raise rates again to keep inflation in check.
Navigating between political pressure and economic realities, the Fed faces a delicate balancing act. Despite the Trump administration’s attempts to oust Fed governors, the central bank’s dual mandate comes from Congress. In setting its policy, it must carefully weigh employment indicators and inflation expectations against broader macroeconomic conditions to safeguard economic stability. Politicizing economic data has the opposite effect: It undermines both the Fed’s ability to make sound decisions and the market’s trust in economic forecasts, and any erosion of central bank independence only exacerbates these challenges.
Jessie Yin is an assistant director at the Atlantic Council’s GeoEconomics Center.
This post is adapted from the GeoEconomics Center’s weekly Guide to the Global Economy newsletter. If you are interested in getting the newsletter, email SBusch@atlanticcouncil.org.
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Further reading
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