Federal Reserve Chairman Powell speaks at a press conference after the Federal Open Market Committee meeting in Washington, DC, on November 7, 2024.
West Village Kent | Getty Images
Federal Reserve Chairman Jerome Powell dodged question after question from a press corps eager to know his thoughts on President-elect Donald Trump at a news conference on Thursday.
At some point, though, Fed policymakers, economists and analysts will need to consider that the firebrand Republican may have an ambitious economic agenda, not to mention a political one.
Trump was pessimistic about Powell’s Fed during his first term, calling policymakers “idiots” and once likening Powell to a golfer who can’t putt. Powell, who was nominated by Trump in November 2017 and took office the following February, largely dismissed the criticism, and on Thursday he shifted focus again.
“I’m not going to get into anything political here today, but thank you everybody,” Powell said after being asked at least six times during his news conference about Trump’s victory and its aftermath. Powell’s remarks were cut short at about 3:12 p.m. ET The meeting time was set, minutes earlier than normal following a politically charged round of questioning.
Yet for the Fed leader, dealing with the consequences of a Trump presidency is all but inevitable.
Upcoming policy measures are expected to include significant tax cuts, expansionary government spending and aggressive tariffs aimed at leveling the global playing field. Trump has also threatened mass deportations of undocumented immigrants, which could alter the labor market.
It’s unclear how Trump’s relationship with Powell will play out this time around – Powell’s term as chairman expires in February 2026 – but it could add another layer to the delicate balance the Fed is trying to maintain through monetary policy. wrinkle.
Differences in policy and politics
“They’re going to put themselves in a difficult position because communication is going to be more difficult and the new administration is going to see policy in its own way,” said chief economist Joseph LaVorgna. Economist at Nikko Securities.
“I don’t know if the Fed will take the same approach as the (new) administration, and I think it could create more tensions,” he added.
LaVolnia has a unique perspective on the situation, having served as chief economist at the National Economic Council under Trump. He may return to Washington in 2025 to serve in the White House again.
Like Trump, Lavonia has been a critic of the Fed, albeit for seemingly contrary reasons, because he believes the Fed made a mistake on Thursday. Cut the base rate by a quarter of a percentage point. Lavolgna instead advocated that the Fed delay raising interest rates until it has a clearer picture of the chaotic economic conditions and uncertainty about the direction of inflation and unemployment.
Trump has historically favored lowering interest rates, although that could change if the Fed cuts rates and inflation rises.
“What if the future outlook becomes more complicated?” Lavonia said. “To me, it’s obvious that they shouldn’t be cutting spending. And then I think President Trump (could) appropriately ask, ‘Why are you cutting spending when things (inflation) actually don’t look as solid as they did before?’ ?
Many economists believe there are signs that, at least on a relative basis, the pace of price increases is slowing and approaching the Fed’s 2% target, and that Trump’s policies could help stimulate inflation. Some of these economists have begun raising their inflation forecasts and lowering their growth outlook this week, despite considerable uncertainty over what the actual content of Trump’s agenda will be.
If these forecasts come true and inflation intensifies, the Fed will have no choice but to respond, possibly by slowing rate cuts or halting them altogether.
Uncertainty about the future
While Powell sidestepped Trump’s remarks, commentary on Wall Street addressed the potential fallout following the Federal Reserve’s decision on Thursday to lower interest rates by another quarter of a percentage point.
“The coming 12 months for Fed policy are indeed going to be a very interesting one,” RSM chief economist Joseph Brusuelas wrote.
Brussulas’ forecast is close to Wall Street consensus and the federal funds futures market’s expectations that the Fed will lower its benchmark interest rate by another full percentage point in 2025.
“This forecast is based on the current state of the economy, all else being equal,” Brussulas said. “Because we are entering an era of unorthodox economic populism, this forecast will be affected by changes in trade and immigration policies, which may “It will change the path of employment, unemployment and wage pressures, leading to higher price levels.”
Although some economists worry Trump’s policies could have significant consequences, and others are taking a more cautious approach given the incoming president’s penchant for the threat of force.
Despite the imposition of steep tariffs that economists feared would sharply raise prices, inflation has never exceeded 3% at any time during Trump’s term, and in fact, based on the Fed’s preferred indicator, it has The expansion rate barely exceeded 2%. In addition, Biden has largely maintained Trump’s tariffs and even added some new tariffs on electric vehicles and other products.
Ultimately, the next round of tariffs could add about 0.3% to inflation, Nationwide chief economist Kathy Bostjancic said.
“We expect this should provide the rationale for the Fed to slow policy easing somewhat, but not stop,” she said. “We are calling for a sharp cut in interest rates next year, which would keep financial market conditions accommodative, which should help consumers and businesses borrowing costs and continue to support the labor market and continued expansion.”
Still, regardless of Trump’s wishes, the prospect of the Fed asserting its independence and adjusting policy in either direction raises potential conflicts.
Trump has previously claimed that the president should at least be consulted on monetary policy. Still, Fed officials insist on independence from fiscal and political considerations, something that may become more difficult in the coming days.
“The easy cuts are done and maybe December won’t be too controversial,” said Elise Osenbaugh, head of investment strategy at JPMorgan Wealth Management. “After that, I think the Fed will ask the same questions investors are asking ——To what extent and when will the incoming Trump administration implement its campaign policy recommendations?”
About The Author
