Powell and the Fed gained't have the ability to keep away from speaking about Trump eternally
Federal Reserve Board Chairman Jerome Powell speaks during a press conference following a meeting of the Federal Open Market Committee on November 7, 2024 in Washington, DC.
Kent Nishimura | Getty Images
Federal Reserve Chairman Jerome Powell dodged question after question at his news conference Thursday from a press corps eager to hear the central bank chief's thoughts on President-elect Donald Trump.
At some point, however, Fed policymakers, economists and analysts will have to grapple with the firebrand Republican's likely ambitious economic — not to mention political — agenda.
During his first term, Trump had a poor opinion of Powell's Fed. He called policymakers “idiots” and once compared Powell to a golfer who couldn’t putt. Powell, who was nominated by Trump in November 2017 and took office the following February, largely shrugged off criticism at the time and deflected it again on Thursday.
“I'm not going to get into politics here today, but thank you,” Powell said during the news conference, after being asked at least half a dozen times about Trump's victory and its implications. Powell broke off the session around 3:12 p.m. ET, a few minutes earlier than normal after the round of policy-heavy questioning.
However, it will be almost unavoidable for the Fed chief to deal with the impact of a Trump presidency.
Expected policy initiatives along the way include drastic tax cuts, expansionary government spending and aggressive tariffs aimed at leveling the playing field globally. Trump has also threatened mass deportations of undocumented immigrants, which could alter the job landscape.
How the relationship between Trump and Powell will play out this time is unclear – Powell's term as chairman ends in February 2026 – but it is likely to once again shake up the delicate balance that the Fed is trying to manage with monetary policy.
Differences in politics, politics
“You're going to be in a bind here because communication is going to be much more difficult and there's going to be a new administration that's going to have its own take on policy,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities.
“It's not clear to me that the Fed is going to take the same approach as that [new] “The government is not doing well and I think that could lead to a lot more tension,” he added.
LaVorgna has a unique perspective on the situation, having served as chief economist at the National Economic Council under Trump. He could return to Washington for another term in the White House in 2025.
Like Trump, LaVorgna has been a Fed critic, although for a seemingly opposite reason, as he believes the central bank made a mistake on Thursday when it cut its key interest rate by a quarter of a percentage point. Instead, LaVorgna argued for the Fed to hold off until it can get a clearer picture of a murky economic landscape with uncertainty about the direction of inflation and unemployment.
Trump has favored lower interest rates in the past, but that could change if the Fed cuts rates and inflation rises.
“What if the outlook became more mixed in the future?” Lavorgna said. “It was clear to me that they shouldn’t make any cuts. And then President Trump, I think.” [could] Correctly ask, “Why do you cut when things happen?” [with inflation] actually don't look as solid as before?'”
Many economists believe Trump's policies could help boost inflation at a time when there are signs that the pace of price increases, at least in relative terms, is slowing back toward the Fed's 2 percent target. Some of those same economists have already started raising their inflation estimates and cutting their growth outlook this week, despite a high degree of uncertainty about what the Trump agenda will actually entail.
If these forecasts materialize and inflation picks up, the Fed will have no choice but to respond, perhaps by slowing the pace of rate cuts or stopping them altogether.
uncertainty ahead
While Powell sidestepped Trump's speeches, Wall Street comments following the Fed's decision on Thursday to cut interest rates by another quarter of a percentage point focused on the potential fallout.
“The coming year of Federal Reserve policy will indeed be a remarkably interesting year,” wrote Joseph Brusuelas, chief economist at RSM.
In a forecast that is close to both the Wall Street consensus and the Fed funds futures market, Brusuelas expects the Fed to cut its key interest rates by another full percentage point in 2025. However, this outlook could 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 subject to changes in both trade and immigration policies that could alter employment trajectories, the unemployment rate and wage pressures, which could lead to a rise in price levels.”
While some economists worry that Trump's policies could have serious consequences, others are taking a more measured approach given the new president's penchant for saber rattling.
Despite the imposition of high tariffs, which economists also feared would dramatically increase prices, inflation never exceeded 3 percent at any point during Trump's time in office and even barely exceeded 2 percent when measured on the Fed's preferred indicator. In addition, President Joe Biden largely retained Trump's tariffs and even added some new ones on electric cars and other items.
According to Nationwide's chief economist Kathy Bostjancic, the next round of tariffs could ultimately increase inflation by about 0.3%.
“We expect this should be a reason for the Fed to slow the pace of monetary easing somewhat, but not to stop it,” she said. “Our call for significant rate cuts next year would maintain easing financial market conditions that will help reduce borrowing costs for consumers and businesses and continue to support the labor market and ongoing expansion.”
Still, the prospect of the Fed asserting its independence and moving its policy in one direction or another regardless of Trump's wishes raises a potential conflict.
Trump has previously claimed that the president should at least be consulted on monetary policy. But Fed officials insist on independence from fiscal and policy considerations, which could become more difficult in the coming days.
“The easy cuts have been made and maybe December won’t be too contentious,” said Elyse Ausenbaugh, head of investment strategy at JP Morgan Wealth Management. “I imagine the Fed will be asking the same questions as investors after this — to what extent and when will the new Trump administration implement its campaign policy proposals?”
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