President Donald Trump has repeatedly expressed frustration with Federal Reserve Chair Jerome Powell, at times even suggesting he should be removed from his post.
And most recently, the director of the Federal Housing Finance Agency joined the chorus, urging the Fed to resume rate cuts.
But despite growing political pressure, don’t expect Powell or the central bank to act anytime soon, said J.P. Morgan Chief Global Strategist David Kelly.
Speaking this week at FPA NorCal’s 53rd annual conference, Kelly underscored a key point: the Fed’s priority remains squarely focused on inflation – not politics.
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Fed independence and the inflation mandate
The Fed operates under a dual mandate from Congress: to promote maximum employment and maintain price stability, generally interpreted as 2% inflation. This framework is designed to insulate monetary policy from political interference, ensuring decisions are based on economic data rather than partisan demands.
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As of March 2025, the U.S. unemployment rate stood at 4.2%, and inflation – as measured by the core personal consumption expenditures (PCE) index – was 2.5% in April.
Kelly noted that Powell has been “crystal clear” in recent press conferences: when inflation and employment goals diverge, the Fed weighs how far each metric is from its target and how quickly it’s expected to move back into range.
“They want full employment, and they want 2% inflation,” Kelly said. “But what if they’re missing both?”
In that case, the Fed doesn’t pick one goal over the other. Instead, it assesses the relative miss – and right now, inflation is the bigger problem. Kelly expects unemployment to tick up to 4.5% by year’s end – just slightly above the Fed’s target. But inflation could climb to 3.5%, well above the Fed’s 2% goal.
“They’re missing more on inflation than they are on unemployment,” Kelly said, suggesting the Fed won’t cut rates in June or September.
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Kelly said one symbolic cut late in the year – “a holiday present to the administration” – is possible. But beyond that, the Fed is likely to wait until there’s “real evidence” inflation is on track to hit 2% before easing further.
Why high rates could persist
Kelly laid out three key reasons why interest rates are likely to remain elevated:
Inflation is still too high: Unemployment is near the Fed’s long-run target, but inflation isn’t. The Fed is far more off-target on price stability, which makes a case for holding rates steady. Unless inflation shows clear and sustained progress, rate cuts will remain off the table.
Global debt is pushing up long-term rates: Massive borrowing needs in the U.S., Europe, and Japan are contributing to higher long-term interest rates. Even if the Fed wanted to cut short-term rates more aggressively, market forces may blunt their impact. “Whatever rates we have right now, that’s kind of it,” Kelly said.
The Fed’s credibility is on the line: Maintaining the Fed’s independence is crucial for market confidence and the stability of the U.S. dollar. If investors begin to suspect the central bank is responding to political pressure rather than economic fundamentals, long-term borrowing costs could rise even further.
What it means for investors
Kelly’s outlook suggests that investors – and the advisers who serve them – should plan for interest rates to stay higher for longer. He expects fixed income returns to average about 5% over the next five years, reflecting this new rate environment.
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And while the Trump administration is pushing for policies designed to juice the economy — including what Kelly referred to as “fiscal fudge” to stimulate growth through 2028 — the Fed’s job is to look past short-term fiscal stimulus and stick to its dual mandate.
The takeaway? Rate cuts may come – but not before the data supports them.
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