Donald Trump's relentless campaign to bully Federal Reserve Chair Jerome Powell into slashing interest rates faces a fundamental contradiction: the president's own economic policies and actions are creating conditions that could force the Fed to do the opposite—raise rates instead, according to the Wall Street Journal's Greg Ip.
According to Ip: "The vibe has changed."
Trump has waged a one-man assault on Powell's credibility, attacking his intellect while his Department of Justice pursued criminal charges against the Fed chair—a move that was decisively rejected by U.S. District Judge James Boasberg just days ago.
Yet despite official messaging that the Federal Reserve remains focused on when and by how much to cut interest rates, the underlying economic picture has shifted dramatically. According to Ip, the Fed's next move might actually be a rate increase.
Three factors are driving the risk: First, inflation remains stubbornly elevated above the Fed's 2% target. Second, surging oil prices threaten to push inflation even further from that target without meaningfully restraining demand. Third, interest rates have fallen substantially since the Fed began easing in 2024 and are continuing downward by some measures.
At its recent meeting, the Fed officially reaffirmed its commitment to rate cuts, penciling in a quarter-point reduction this year and another next year. But Fed Chair Jerome Powell added a critical caveat: that outlook is conditional on inflation falling.
Markets are already pricing in the shift. Global government bond yields have climbed on expectations of more aggressive central banks worldwide. In the U.S., markets have slashed the probability of a Fed rate cut this year from 72% at the end of 2025 to just 37%, while simultaneously raising the probability of a rate increase from 11% to 45%, according to the Atlanta Fed.
Normally, the Fed would dismiss temporary inflation spikes from oil price jumps and focus instead on the damage higher energy costs inflict on consumer incomes and spending—a dynamic that would argue against raising rates and might even justify cuts if severe enough.
But current damage appears limited. Even if gasoline reaches $4 a gallon in coming days, that represents a third less purchasing power, adjusted for inflation, than during the 2008 oil price spike. Meanwhile, Americans are consuming less gasoline while producing 42% more goods and services than they did then.