Key Points
- The Federal Reserve was divided in 2025 between fighting inflation and protecting a soft labor market.
- President Trump’s tariff policies and political pressure complicated the Fed’s decisions.
- The Fed cut interest rates three times in the fall as the economy showed signs of cooling.
- A new Federal Reserve chair in 2026 will likely struggle to build consensus within a divided bank.
The Federal Reserve spent 2025 caught between a rock and a hard place. For the first time since the 1970s, officials had to fight rising prices (inflation) while also worrying about a weakening job market. This conflict caused deep divisions inside the central bank that haven’t been seen in years. That infighting is expected to continue right into 2026.
Adding to the chaos, President Trump’s aggressive new policies kept everyone guessing. His frequent changes to tariffs and his push to limit immigration forced the Federal Reserve to remain on the sidelines for much of the year. The President repeatedly hammered the Fed to lower interest rates and even tried to remove Chairman Jerome Powell from his post.
Initially, many officials believed the tariffs would only cause a temporary price spike. However, after Trump’s “Liberation Day” in April imposed the highest tariffs in a century, fears of long-term inflation grew.
However, as summer arrived, the job market began to show serious cracks. This prompted Powell and the Federal Reserve to cut interest rates three times in the fall to prevent the economy from slowing too much.
The divisions inside the Fed became obvious by the end of the year. During the December meeting, two members voted against reducing rates because they remained concerned about inflation. At the same time, another member voted for an even bigger rate cut to help the job market more. It was a clear sign that the group couldn’t agree on which problem was more important.
Looking ahead, a new Federal Reserve chair will take office for the first time in eight years. The President will likely pick someone who favors lower interest rates. Even so, the new leader will inherit a divided committee.
If inflation remains high, they will have a difficult time convincing the inflation “hawks” to vote for further cuts. While most experts expect rates to fall again in 2026, the path forward will be anything but smooth.
