Federal Reserve Chairman Jerome Powell speaks during a press conference after the Federal Open Market Committee meeting in Washington, DC, November 7, 2024.
Kent Nishimura | Getty Images
Federal Reserve Chairman Jerome Powell fielded a flurry of questions from reporters at a Thursday press conference seeking to get central bank leaders’ thoughts on President-elect Donald Trump.
But at some point, Fed policymakers, economists, and analysts will need to explain the ambitious agenda of Republican lawmakers, not to mention political policy and perhaps even ambitious economic policy. Dew.
During his first term in office, Trump belittled the Fed, calling its policymakers “crazy” and at one point likening Powell to a golfer who can’t putt. Powell, who was nominated by President Trump in November 2017 and took office in February of the following year, largely shrugged off the criticism at the time, but on Thursday he again deflected.
“I’m not going to get into politics here today, but thank you,” Powell said at a news conference, after being asked at least six times about Trump’s victory and its impact. Chairman Powell ended the session at around 3:12 p.m. ET, several minutes earlier than usual, after taking a politically charged question and answer session.
But for Fed leaders, dealing with the fallout from Trump’s presidency will be all but inevitable.
Future policy ideas include deep tax cuts, expanded government spending, and aggressive tariffs aimed at leveling the global playing field. President Trump has also threatened mass deportation of illegal immigrants, which could change the state of the labor market.
It’s unclear how the relationship between Trump and Powell will play out this time around, though Powell’s term ends in February 2026, adding another wrinkle to the delicate balance the Fed is trying to navigate with monetary policy. likely to be added.
Differences in policy and politics
“They’re going to be in trouble here because communication is going to be more difficult and there’s going to be a new administration with its own views on policy,” said Chief of Staff Joseph LaVogna. Economist at SMBC Nikko Securities.
“It’s not clear to me whether the Fed is going to take the same type of approach that the (new) administration is taking, but I think that could lead to more tensions,” he said.
LaVogna has a unique perspective on the situation, having previously served as chief economist at the National Economic Council during the Trump administration. He could return to Washington in 2025 and assume a White House role.
Like Trump, LaVogna is a critic of the Fed, but for seemingly the opposite reason: He thinks the Fed made a mistake in cutting benchmark interest rates by a quarter of a percentage point on Thursday. LaVogna instead argued that the Fed should refrain from acting until it has a clearer picture of the economic situation, which is muddied by uncertainty over the direction of inflation and unemployment.
President Trump has long supported low interest rates, but that could change if the Fed cuts rates and inflation rises.
“What if the outlook becomes more complex in the future?” LaVogna said. “To me, it was clear that rates shouldn’t be cut. And President Trump could rightly be asked, ‘Why cut rates when[inflation]actually doesn’t look as strong as it used to?’ ) I think
Many economists believe President Trump’s policies could help stimulate inflation, with signs that the pace of price growth is slowly returning toward the Fed’s 2% target, at least in relative terms. I think there is. Despite the high degree of uncertainty about what President Trump’s policies will actually entail, some economists have already begun to revise their inflation expectations upward this week and lower their growth forecasts.
If these expectations come true and inflation accelerates, the Fed will likely be forced to respond by slowing the pace of rate cuts or stopping them altogether.
uncertainty of the future
Powell avoided a meeting with President Trump, but Wall Street commentary cited the potential impact after the Fed decided to cut interest rates by another quarter of a point on Thursday.
“Next year is going to be a really interesting 12 months for Federal Reserve policy,” said Joseph Brusuelas, chief economist at RSM.
Mr. Bruelas expects the Fed to cut the benchmark rate even more fully in 2025, a forecast that is close to the consensus on Wall Street and the federal funds futures market. However, that outlook is subject to change.
“This forecast is based on the economic status quo, all else being equal,” Brusuelas said. “As we enter an era of unorthodox economic populism, this forecast is likely to change in both trade and immigration policy, which could change employment trajectories and increase the unemployment rate. and wage pressures could cause price increases.
Some economists worry that President Trump’s policies could have a big impact, but others take a more cautious approach given the president-elect’s tendency to wield a sword. There are some too.
Inflation never rose above 3% at any point during President Trump’s term, and in fact, the Fed’s Judging by the recommended indicators, it was just barely below 2%. Additionally, President Joe Biden has kept most of President Trump’s tariffs in place and added new tariffs on electric vehicles and other items.
Ultimately, the next round of tariffs could push inflation up by about 0.3%, said Kathy Bojancic, chief economist at Nationwide.
“We expect this to be a reason for the Fed to slightly slow the pace of policy easing, but not stop it,” he said. “Our calls for significant rate cuts next year will help keep borrowing costs down for consumers and businesses, and maintain easy financial market conditions that continue to support the labor market and continued expansion. ”
Still, the prospect of the Fed asserting its independence and moving policy in either direction, regardless of President Trump’s wishes, raises a potential conflict.
Trump has previously insisted that the U.S. should consult with the president, at least on monetary policy. But Fed officials insist on independence from fiscal and political considerations, which could lead to further toughening.
“December probably won’t be too controversial because we’ve had an easy rate cut,” said Ellis Osenbaugh, head of investment strategy at JPMorgan Wealth Management. “Then, I think the Fed is asking the same questions that investors are asking: When and to what extent will the incoming Trump administration implement its election policy proposals?”
