Chair Powell answers reporters' questions at the FOMC press conference on January 29, 2025. Source: Federal Reserve.
The Pound to Dollar exchange rate looks better supported as Trump angles for a weaker Dollar through Federal Reserve intervention.
The Federal Reserve is independent but not immune to political interference, as markets are finding out under Trump's second reign.
The President's latest intervention in U.S. monetary policy overshadowed the Federal Reserve's decision to keep interest rates unchanged on January 29.
Following the decision, President Donald Trump told reports, "Jay Powell and the Fed failed to stop the problem they created with Inflation."
"If the Fed had spent less time on [diversity, equity and inclusion], gender ideology, ‘green’ energy, and fake climate change, Inflation would never have been a problem," he added.
The Fed's first policy decision of 2025 comes after he told the World Economic Forum the Fed should cut interest rates "a lot", adding that he would "let it be known" if he disagreed with Chair Jerome Powell's decisions.
The implications for the Dollar are significant, as it is clear Trump wants lower interest rates, which ultimately implies a lower Dollar. A weaker currency in turn helps U.S. manufacturers and assists Trump in rebalancing global trade imbalances. A lot of focus has been on tariffs as the tool to achieve this, but he certainly needs the assistance of the currency.
This all suggests the downside in the Pound to Dollar exchange rate is better protected and limits the potential for a fall to 1.20 and below while firming the outlines of a more sustained recovery in the coming months.
The Fed kept interest rates on hold and said U.S. inflation remained "somewhat elevated" and removed an earlier reference noting "progress" towards hitting its 2 per cent goal.
Pre-Trump 2.0, would be considered a 'hawkish' assessment and would have bolstered the case for a Dollar upside.
However, markets now need to second-guess the policy framework within the context of the activist U.S. executive.
"Damage to the Fed's independence does not have to happen in a big bang. It can also take place at the margin and perhaps only produce a slightly looser monetary policy than would have been expected, ceteris paribus, with a normal US government," says Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank.
"Perhaps one day it may be necessary to decide on one or two interest rate cuts that would otherwise not have been decided on. Or to postpone a rate hike," he explains.
A sign of an at-the-margin shift in the Fed was the exit from the NGFS, just days before Trump was inaugurated.
Leuchtmann says he is not concerned about social media interventions, noting that Trump was prone to commenting in his first term, and the Fed's independence wasn't damaged.
Instead, the more concerning signal should be Trump's assertion that the Fed is "absurdly overstaffed," which suggests it could become a target for staff reductions under the DOGE programme.
"What these people do has such an immense impact on the fate of the US economy that there is no room for staff cuts. Anyone demanding this is really up to something else: weakening the Fed," explains the Commerzbank analyst.