Federal Reserve Chairman Jerome Powell speaks during a press conference after the Federal Open Market Committee meeting in Washington on November 07, 2024 in Washington, DC.
Kent Nishimura | Getty Images
Federal Reserve Chairman Jerome Powell dodged question after question at his Thursday news conference by a press corps eager to elicit the central bank leader's thoughts on President-elect Donald Trump.
But at some point, Fed policymakers, economists and analysts will need to take into account what is likely to be an ambitious economic — not to mention political — agenda from controversial Republicans.
Trump had a dim view of Powell's Fed during his first term in office, calling policymakers “stupid” and once likening Powell to a golfer who can't putt a ball. Powell, who was nominated by Trump in November 2017 and took office the following February, largely shrugged off criticism at the time, and backtracked again on Thursday.
“I'm not going to get into any of the political stuff here today, but thank you,” Powell said during the news conference after being asked at least six times about Trump's victory and its repercussions. Powell cut short the hearing around 3:12 p.m. ET, a few minutes earlier than usual after a round of politically heavy questioning.
However, dealing with the fallout from a Trump presidency will be almost inevitable for the Fed leader.
Among the policy initiatives expected down the road are steep tax cuts, expansionary government spending, and tough tariffs aimed at leveling the playing field. Trump also threatened mass deportation of illegal immigrants, something that could change the labor market landscape.
It's unclear how the relationship between Trump and Powell will develop this time around — Powell's term as chairman ends in February 2026 — but it is likely to add another wrinkle to the delicate balance the Fed is trying to navigate using monetary policy.
Differences in policy and policy
“They're going to put themselves in a bind here, because communications are going to get more difficult, and there's going to be a new administration coming in with their own way of seeing policy,” said Joseph LaVorgna, chairman of the board. Economist at SMBC Nikko Securities.
He added: “It is not clear to me that the Fed will take the same approach as the (new) administration, and I think that may lead to more tension.”
LaVorgna 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 spend another term in the White House.
Like Trump, LaVorgna has been a critic of the Fed, but apparently for the opposite reason, as he believes the central bank made a mistake on Thursday when it cut its benchmark interest rate by a quarter of a percentage point. Instead, LaVorgna called on the Fed to wait until it can get a clearer picture of the muddy economic landscape with uncertainty about the direction of inflation and unemployment.
Trump has historically favored low interest rates, although that too could change if the Fed cuts rates and inflation rises.
“What if expectations become more mixed in the future?” LaVorgna said. “For me, it was clear that they should not be cutting rates. And then I think President Trump (can) rightly ask: Why are you cutting when things (with inflation) actually don't look as solid as they were before?” “”
Many economists believe Trump's policies could help stoke inflation at a time when evidence shows, at least on a relative basis, that the pace of price increases is slowing toward the Fed's 2% target. Some of those economists have already begun this week to raise their inflation estimates and lower their growth forecasts, despite the high level of uncertainty about what Trump's agenda will actually include.
If these expectations come true and inflation rises, the Fed will have no choice but to respond, perhaps by slowing the pace of interest rate cuts or stopping altogether.
Uncertainty in the future
While Powell avoided talking about Trump, Wall Street's comments in the wake of the Fed's decision on Thursday to cut interest rates by another quarter of a percentage point addressed the potential fallout.
“Next year in Fed policy will be a remarkably interesting twelve months already,” wrote Joseph Brusuelas, chief economist at RSM.
In a forecast close to the Wall Street consensus as well as the federal funds futures market, Brusuelas expects the Fed to cut another full percentage point from key interest rates in 2025. But these forecasts may be subject to change.
“These forecasts are based on the continuation of the current economic situation, all other factors remaining equal,” Brusuelas said. “Because we are entering an era of unconventional economic populism, these forecasts are subject to changes in both trade and immigration policy that could change the trajectory of employment, the unemployment rate, and wage pressures that could cause an increase in the price level.”
While some economists worry that Trump's policies could cause major repercussions, others take a more moderate approach given the next president's penchant for saber-rattling.
Despite the implementation of heavy tariffs that economists also feared would raise prices significantly, inflation never exceeded 3% at any time during Trump's term, and in fact barely exceeded 2% according to the Fed's preferred index. Furthermore, President Joe Biden has kept Trump's tariffs largely the same, even adding some new tariffs on electric vehicles and other items.
Ultimately, the next round of tariffs could add about 0.3% to inflation, according to Nationwide's chief economist, Cathy Bostiancic.
“We expect this to provide a reason for the Fed to slow the rate of policy easing slightly, but not stop it,” she said. “Our call for significant interest rate cuts over the next year should maintain easing financial market conditions, helping lower borrowing costs for consumers and businesses and continuing to support the labor market and continued expansion.”
However, the possibility of the Fed asserting its independence and moving policy in either direction, regardless of Trump's wishes, sets up a potential clash.
Trump has previously stressed that the president should at least be consulted on monetary policy. However, Fed officials insist on independence from financial and political considerations, which may become more difficult in the coming days.
“The easy cuts have been made, and December probably won't be as controversial either,” said Elise Ossenbaugh, head of investment strategy at JPMorgan Wealth Management. “Then, I imagine the Fed is asking the same questions investors are asking — to what extent and when will the incoming Trump administration implement its campaign policy proposals?”
