As 2025 drew to a close, the world’s financial markets found themselves at the mercy of policy shifts and personality clashes in Washington, D.C. The return of Donald Trump to the White House sent ripples through global economies, with U.S. tariffs and Federal Reserve policy dominating headlines and investor sentiment. At the heart of it all: a fierce debate over interest rates, trade, and the future direction of the U.S. economy.
National Economic Council Director Kevin Hassett, now widely seen as a frontrunner to succeed Jerome Powell as Federal Reserve Chair, didn’t mince words in a recent CNBC interview. Despite the U.S. economy’s robust performance—annualized growth clocked in at 4.3% in the third quarter, handily beating expectations—Hassett argued the Fed was dragging its feet. “If you look at central banks around the world, the U.S. is way behind the curve in terms of lowering rates,” he told CNBC’s “Money Movers.”
Hassett credited much of the economic momentum to the Trump administration’s aggressive trade policy. Notably, he claimed that 1.5% of the third quarter’s growth was attributable to President Trump’s tariffs, which he said had helped reduce the U.S. trade deficit. These tariffs, first imposed in April and expanded throughout the year, hit a broad swath of imports: 50% on steel and aluminum, then extending to over 400 products by August. By year’s end, a baseline 10% tariff applied to all U.S. trading partners, with China facing a staggering 47.5% tariff on all goods exported to the U.S. In return, China imposed 31.9% tariffs on all U.S. exports. Canada, Mexico, India, and Brazil were also targeted, with specific levies tied to issues such as fentanyl smuggling and oil purchases from Russia, according to reporting by the Atlantic Council and the Peterson Institute for International Economics.
The Federal Reserve, meanwhile, found itself in a bind. The central bank had forecast two interest rate cuts for 2025, but ultimately delivered three, including a 25 basis point trim in December. That move brought the federal funds rate down to a range of 3.5% to 3.75%, the lowest since 2022. Yet, the decision was anything but unanimous. Three Fed governors dissented—the most since 2019—and Chair Jerome Powell described the December cut as a “close call.” According to CNBC, this division reflected a broader split within the Federal Open Market Committee, with some officials pushing for a more aggressive pace of cuts, while others urged caution in the face of tariff-driven inflation risks.
Powell, for his part, acknowledged the uncertainty. “A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it,” he said, highlighting the strongly divergent views among policymakers. Earlier in the year, Powell had warned that Trump’s tariffs might revive inflationary pressures, prompting the Fed to hold rates steady for consecutive meetings in March. As the year progressed, those concerns eased, but the scars of the debate lingered.
President Trump, never one to shy from confrontation, spent much of 2025 lambasting Powell for what he saw as overly cautious monetary policy. On social media and in public addresses, Trump repeatedly demanded lower rates, at times resorting to personal attacks. He called Powell “Too Late,” a “major loser,” and a “fool,” according to FXStreet. Trump’s frustration boiled over as he threatened to fire Powell—though, as legal analysts noted, he lacks the authority to do so. Still, the president’s influence was unmistakable. In a high-profile move, he appointed Stephen Miran, an advocate for lower rates, to the Federal Reserve Board of Governors, replacing Adriana Kugler. Miran favored 50 basis point cuts at the last two meetings of the year, signaling a clear shift toward a more dovish stance at the Fed.
Amid all this, Hassett emerged as a key voice. While his proximity to Trump sparked concerns among some Fed watchers about the central bank’s independence, Hassett insisted to CNBC that such independence is “really important.” Yet, the political winds were hard to ignore. Trump announced plans to nominate a new Fed Chair soon, promising to pick “someone who believes in lower interest rates by a lot.” His rationale was clear: “I want my new Fed Chairman to lower Interest Rates if the Market is doing well, not destroy the Market for no reason whatsoever. I want to have a Market the likes of which we haven’t had in many decades, a Market that goes up on good news, and down on bad news, the way it should be, and the way it was. Inflation will take care of itself and, if it doesn’t, we can always raise Rates at the appropriate time — But the appropriate time is not to kill Rallies, which could lift our Nation by 10, 15, and even 20 GDP points in a year — and maybe even more than that!” Trump declared on social media.
The impact of these policies extended well beyond Washington. By late 2025, tariffs had become a fixture of global trade, but their inflationary bite seemed to be fading. Fed Chair Powell and other central bankers began to describe the price increases as a “one-time” effect. Still, the trade war between the U.S. and China showed no signs of abating, with both sides maintaining steep levies on each other’s goods.
Across the Atlantic, the European Central Bank (ECB) charted a different course. Between June 2024 and June 2025, the ECB cut rates eight times, bringing its main refinancing rate to 2.15%. After that, officials hit pause, signaling a data-dependent approach. ECB President Christine Lagarde repeatedly stated the central bank was in a “good place,” though the eurozone’s economic growth remained subdued—just 0.3% in the third quarter of 2025. The ECB forecasted modest improvements, projecting 1.2% growth in 2026 and 1.4% in 2027. Inflation, too, was expected to ease, dipping from 2.1% in 2025 to 1.9% in 2026. Yet, not all ECB officials were convinced; some warned of mounting inflationary risks, while others cautioned against letting inflation undershoot the central bank’s 2% target.
For investors, the year was a rollercoaster. Wall Street soared to new highs, buoyed by hopes that a more dovish Fed—and a pro-growth White House—would keep the good times rolling. Yet, the path forward remained uncertain. The Fed’s own projections suggested just one rate cut in 2026 and another in 2027, even as markets bet on a more aggressive easing cycle, especially if Trump’s pick for Fed Chair takes the helm after Powell’s term ends in May 2026.
Looking ahead, the debate over interest rates, central bank independence, and the balance between inflation and growth is far from settled. As the world’s largest economy barrels into 2026, all eyes are on the White House and the Federal Reserve—wondering, perhaps a bit anxiously, what comes next.
