Rudolph Angler Donald Trump’s recent election victory is expected to introduce complications for the Federal Reserve’s plans to maintain economic stability and manage inflation effectively. With his intentions to implement broad tariffs and stricter immigration policies, analysts warn of possible inflationary outcomes. Trump has also expressed a desire to have a say in monetary policy decisions, which could reduce the Fed’s independence in its policy-making.
The Federal Reserve could face significant obstacles as it aims to foster economic growth while controlling inflationary pressures. Trump’s proposed economic policies, including high tariffs and a crackdown on immigration, could lead to higher prices. Markets appear to be bracing for these inflationary impacts, with both Fed fund futures and Treasury yields reflecting expectations of these changes. This presents a dilemma for the Fed, which has only recently resumed cutting interest rates. With inflation potentially on the rise, the Fed may be forced to reconsider further rate cuts, as it typically raises rates to control inflation.
As of now, the Federal Reserve is expected to lower interest rates by 25 basis points at its upcoming meeting. However, the likelihood of further cuts in December has recently decreased, from 83% earlier in the month to 71% as of Thursday, according to the CME FedWatch tool. The January forecast for additional rate cuts has also declined, dropping from 44% to 28%. Treasury yields surged post-election, with the 10-year bond yield rising 21 basis points, its highest in several months, and the 30-year bond yield marking its biggest increase since March 2020. Glen Smith, CIO at GDS Wealth Management, commented that this week’s expected rate cut might be the last for a while, as the recent surge in bond yields complicates the Fed’s efforts to ease its policy stance.
Ahead of the election, economists warned that Trump’s proposed 20% tariffs on imports and 60% tariffs on Chinese goods could drive up prices, while his immigration policies could lead to higher wage growth. These factors could hinder the Fed’s inflation control efforts, as it spent the past two years raising rates to cool the economy before beginning rate cuts in September. Nobel laureate Paul Krugman emphasized the scale of this risk, stating, “The tariff issue is enormous. We’re talking about an inflationary shock that is bigger than almost anything else you could do through federal policy.” However, it’s worth noting that consumer prices remained relatively stable during Trump’s first term, despite the trade tensions with China. Yet this time, Trump’s proposed tariffs are likely to be broader and not limited to China.
Trump’s administration may also challenge the Fed’s independence in policy decisions. Reports suggest that his allies are considering steps to involve the President directly in rate-setting decisions and potentially remove Fed Chair Jerome Powell, whose term extends until 2026. A study from the Peterson Institute of International Economics warned that compromising the Fed’s independence could cost the economy $300 billion and heighten inflation.
As the Fed concludes its meeting this week, there is speculation about whether Chair Powell will address the incoming Trump administration in his plans. However, analysts at Pantheon Macroeconomics believe that such remarks are unlikely, given the unpredictable nature of Trump’s economic strategy. They wrote, “Mr. Powell will likely avoid giving strong policy signals in the press conference, as predicting President-elect Trump’s next moves has proven challenging.” The firm suggests that Powell’s best approach for preserving the Fed’s independence over the next four years may be to maintain a diplomatic and neutral stance in his comments.