BREAKINGVIEWS-Fed puts up guardrails for Jay Powell's successor

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Gabriel Rubin

WASHINGTON, Dec 10 (Reuters Breakingviews) - The Federal Reserve’s eroding tradition of genteel consensus augurs a bigger clash with the White House. A divided decision to cut the benchmark interest rate by 0.25 percentage point on Wednesday was followed by Chairman Jerome Powell declaring the central bank “well-positioned” against threats to price stability. The message is clear: there's no hurry to reduce borrowing costs much further, no matter who occupies the chair's seat come May.

All things considered, President Donald Trump should be pleased with the Federal Open Market Committee. The group has grown more confident in economic expansion, projecting a 2.3% increase in GDP next year, up from the 1.8% anticipated in September. Inflation is also likely to ease, to 2.4% at the end of 2026, cooler than the 2.9% projected for the end of this year. Even so, at that rate it would be the sixth consecutive year of prices broadly exceeding the Fed's 2% target. Limited job turnover leaves the Fed reluctant to intervene on behalf of employment either.

Kevin Hassett, who Trump has effectively designated to replace Powell without formally choosing him, is offering conciliatory gestures to investors worried about his eagerness to please the president with lower rates. The National Economic Council director said the chair's role is to "do the right thing" and that if inflation spiked to "say, 2.5% to 4%" then the FOMC couldn't cut, in remarks at a Wall Street Journal conference this week. He added that the U.S. economy has "plenty of room" for further monetary easing.

There's little evidence, however, that markets have confidence he could win that argument. Mutual fund giant Vanguard projects a 3.5% policy rate at the end of 2026, implying the Fed is finished for a long while. Bank of America analysts expect a 0.5 percentage point reduction over the new Fed chief's first two meetings and little scope for more after that.

Others wishfully anticipate a more aggressive FOMC, cajoled by Trump and Treasury Secretary Scott Bessent, with some seeing rates dropping below 3% before bond markets revolt. With three dissents this month on the committee, the most since 2019, and the 12-member group itself flagging just one snip next year, however, it will be hard for Hassett or anyone else to strong-arm the Fed.

Follow Gabriel Rubin on Bluesky and LinkedIn.

CONTEXT NEWS

The Federal Reserve on December 10 reduced its benchmark interest rate by 0.25 percentage point to a 3.5% to 3.75% range, with three dissents to the decision among the central bank's 12-member Federal Open Market Committee. It projected one cut in 2026.

President Donald Trump said on December 2 that he would announce his nominee for Fed chair early in 2026. He has strongly hinted that he plans to select National Economic Council Director Kevin Hassett to succeed Chairman Jerome Powell.

(Editing by Jeffrey Goldfarb; Production by Pranav Kiran)

((For previous columns by the author, Reuters customers can click on RUBIN/gabriel.rubin@thomsonreuters.com))