Fed Renovation Costs Stir Debate Between Trump and Powell, No Dismissal

TradingKey - On July 24, President Donald Trump made a visit to the Federal Reserve headquarters to inspect its renovation project, a move seen as an escalation of pressure on Fed Chair Jerome Powell. However, during the visit, Trump stated he wouldn't dismiss Powell over the renovation's budget overruns.

During the inspection, Trump and Powell debated the budget overages of the Fed's renovation and the ongoing refusal to lower interest rates. 

Trump presented Powell with paper documents detailing the cost of the Federal Reserve headquarters renovation, asserting that expenses exceeded $3.1 billion. Powell dismissed this claim, suggesting Trump erroneously included a government building constructed five years ago in the calculations.

Trump remarked that he would typically fire a project manager for budget overruns, but reassured Powell, emphasizing that his aim was not personal but rather to see the project through to completion. He clarified that firing someone is a significant move and that Powell is under no pressure to resign as his term is nearing its end. "I just want to see one thing happen, very simple: Interest rates come down."

Nick Timiraos, a journalist often referred to as the "Fed Whisperer," previously indicated that the controversy surrounding the Fed’s renovation is essentially an attempt by Trump to tarnish Powell’s credibility, aiming to pressure him into lowering rates or resigning. Although Trump’s recent visit showed more goodwill toward Powell, the underlying motive to prompt a rate cut through the renovation budget overrun remains unchanged.

On the political front, according to Brian Gardner, a Washington policy strategist at Stifel, Trump’s focus on the Fed renovation project serves as a distraction from other controversies, including the uproar over the Epstein case—where Trump had promised during his campaign to disclose related documents. This month, the DOJ and FBI announced they would no longer release them, causing a stir among Trump supporters. Surveys show that 69% of respondents believe the Trump administration is hiding something regarding the Epstein case.

Nevertheless, even if Trump successfully shifts public attention to the Fed’s budget overrun, it might not counteract his declining approval ratings. According to the latest Gallup poll, Trump’s approval rating has fallen to 37%, the lowest of his current term. He scores poorly on key issues like immigration and the economy, which were central to his campaign promises.

In economic matters, prior to his personal “inspection,” Trump had criticized Powell for months over the Fed's reluctance to cut rates and had implied considering Powell's dismissal. Although he later assured he wouldn’t fire Powell, Trump's allies continue to pressure Powell for a rate reduction.

Trump previously claimed a 2% rate cut by the Fed would save the US over $600 billion in interest costs, noting the high current interest cost as a primary reason for his strong push for rate cuts.

However, recent research by Deutsche Bank indicates that even if Trump forces a rate cut, it would barely alter the current high debt situation, and excessive cuts might backfire. Deutsche Bank added that if Powell were forcibly dismissed and rates cut to 1%, a much larger reduction than expected, the dynamics of short and long-term debt would become more pronounced, increasing debt costs.

The next Federal Reserve meeting is scheduled for July 30, with the CME FedWatch tool currently predicting only a 2.6% probability of a rate cut at this meeting.

July Rate Cut Expectations, Source: CME FedWatch