MNI INTERVIEW: Fed Faces Politically Tumultuous Year - Bullard

The Trump administration's efforts to gain influence over U.S. monetary policy are setting up for the most consequential showdown over Fed independence in decades with a wide range of potential outcomes, former Federal Reserve Bank of St. Louis President James Bullard said in an interview.   

"2026 is going to be a very tumultuous year for the Fed," he told MNI. "For an organization that's been through a lot of tumultuous years, by comparison this will be pretty fundamental to see if the institution's underpinnings can hold up." 

On the U.S. economy itself, Bullard is bullish. The AI spending boom and Trump's tax and spending legislation are major forces driving growth, while the relatively low unemployment rate and looser financial conditions bode well for consumption, he said. 

"Growth will be good in 2026, and that lessens the pressure for the Fed to do any more than what they’ve done already," he said. 

COMPETING INTERESTS

That investors are voicing concern Kevin Hassett will agitate for aggressive rate cuts to align with Trump could have an effect on the ultimate pick of a president sensitive to market reaction, Bullard said. A Fed chair must satisfy three criteria: political standing inside the Beltway, the academic community and credibility on Wall Street that they'll pursue low and stable inflation, he said.

Powell's successor is also likely to be tested by markets, and his view on policy may shift as a result, Bullard said. Alan Greenspan initiated a tightening cycle to combat inflationary pressures shortly after taking office in 1987, but the Black Monday stock market crash just two months later forced him to abandon his hawkish stance, he noted.  

"It’s often the case that a new chair gets tested early in their term, and even if they know the organization, they don’t always appreciate how sensitive markets can be," he said, adding the smoothest transitions have been those of the past three Fed leaders, all of whom were elevated from the Board of Governors.  

Aside from the new Fed chair, potential changes to the institution are set to test the century-old Federal Reserve Act that sought to balance short-run political with longer-run economic interests as well as national and local interests, Bullard said. 

The Supreme Court's interpretation of law around the removal of governors could deliver Trump a 4-3 majority on the Board of Governors, expanding presidential influence in Washington. That in turn opens up an option not to re-authorize the 12 regional Fed presidents for their five-year terms. 

The proposed three-year residency rule for Fed bank presidents also suggests the administration is preparing to exert leverage over the regional network -- potentially remaking how the Fed works from top to bottom.  

"There's a wide range of outcomes," Bullard said. 

NEAR NEUTRAL

The FOMC should wait until January to lower rates, rather than pushing ahead with a rate cut this week having little new data in hand, Bullard said. 

"It's going to be a minor mistake," he said. "The risk is they go ahead and make this move, and the outlook brightens up with strong data, and now you can’t take that move back." 

The jobs data released since the federal government shutdown ended indicated improved hiring in September than over the summer, while other indicators point to a steady state labor market, Bullard said. Meanwhile, headline and core PCE inflation were last seen at 2.8% in September. 

The hawks' argument that inflation hasn't budged in 18 months is a good one, Bullard said. The median official is likely to continue to see just one more cut next year, he said. "They risk ongoing inflation well above the 2% target and I don’t think they want to risk that." (See: MNI INTERVIEW: Fed Risks Overcutting As Inflation Lingers)

Monetary policy is modestly restrictive now, but "if they continue to go down, they’ll take the pressure off inflation and risk it going to the 3% range. That’s something that needs to be priced in."