Economics Update September 2025 - The politicization of the US Federal Reserve is already causing damage

The environment for monetary policy decisions by the US Federal Reserve (Fed) is currently extremely difficult: First, the further development of the labor market is fraught with considerable uncertainty; second, it is unclear whether the foreseeable rise in inflation due to import tariffs will be temporary or long-term in nature. And a third, additional complicating factor is the massive attempt to exert political influence on the Fed's monetary policy decisions.

With regard to the labor market, the very low level of job creation in recent months is fueling concerns about a significant deterioration in the situation. However, the low employment growth could also be due to a reduced labor supply as a direct consequence of Trump's immigration policy. In our view, a slump in the labor market, i.e., a rapid rise in the unemployment rate, is conceivable but not very likely for the time being. In our view, a slump in the labor market, i.e., a rapid rise in the unemployment rate, is conceivable but not very likely for the time being.

The effects of the tariff policy are now evident in the price trend data: in July, producer prices excluding energy prices rose by 0.6 percent compared to the previous month – with around half of the tariffs imposed by US President Donald Trump not yet in force at that time. Even if the tariffs are only partially passed on to end consumers, significant price increases are still to be expected from August onwards. The inflation rate is likely to be around 3.5 percent at the end of the year, well above the Fed's target of 2 percent.

Is the US Federal Reserve repeating its mistake from 2022?

At first glance, tariffs appear to be an additional tax on the products concerned. It is therefore not unreasonable to assume that the price-increasing effect of tariffs could be temporary. If this were the case, the inflation rate would return to normal after about a year, and monetary policy could then “look through” this factor and cut interest rates despite the higher inflation rate. However, there are serious counterarguments. The most important one concerns the risk of second-round effects: if the labor market is more or less at full employment, a temporarily higher inflation rate could lead to stronger wage increases. In this case, the inflationary effect would become entrenched. In addition, the substantial tax refunds that US citizens can expect in the spring could drive up overall economic demand and have additional price-increasing effects. In this case, if the Fed were to cut interest rates, it would be repeating its mistake from 2022. At that time, it considered rising inflation to be temporary for too long and was ultimately forced to raise interest rates too drastically.

When Fed Board member Christopher Waller now advocates for interest rate cuts in the near future, his ambitions to succeed Fed Chair Jerome Powell are the proverbial elephant in the room. The mere suspicion that the monetary policy positioning in the run-up to the The mere suspicion that the monetary policy positioning in the run-up to the September meeting is not based solely on technical analysis, but could also be motivated by a desire to please President Trump, damages the Fed's reputation.

If doubts about the independence of monetary policy continue to grow, a massive loss of confidence among capital market players and, as a result, a global financial crisis would be a highly probable scenario. In the short term, the Fed will probably demonstrate unity once again with a 25 basis point interest rate cut in 
September. For 2026, however, investors should consider from the outset the scenario of major financial market turmoil as a result of a significant erosion of confidence in the independence of the Fed as an institution.