Washington:
Donald Trump’s upcoming return to the White House and the uncertainty surrounding his policy proposals are beginning to impact the US Federal Reserve, leading to concerns of a potential clash between the central bank and the president-elect.
Fed chair Jerome Powell acknowledged on Wednesday that Trump’s economic agenda, which includes the threat of significant tariff increases, the continuation of tax cuts, and large-scale deportations, factored into the discussions among members of the rate-setting committee regarding the anticipated number of interest rate cuts for the upcoming year.
“Some committee members cited policy uncertainty as a contributing factor to their increased uncertainty regarding inflation,” Powell stated following the Fed’s decision to reduce rates by a quarter point and project only two cuts in 2025.
“We are unsure about which countries and products will be subjected to tariffs, for how long, and at what scale,” he explained. “We are uncertain about the possibility of retaliatory tariffs and how this might impact consumer prices.”
Prior to this, Powell had refrained from commenting on how the Fed was assessing the potential implications of the incoming administration’s economic policies.
Trump has persistently claimed that tariffs, if “properly used,” would benefit the US economy.
“Our country is currently losing to everyone,” he asserted to reporters at his Florida residence recently. “Tariffs will make our country prosperous.”
Given the ambiguity surrounding Trump’s intentions, the decision by many policymakers to project so few rate cuts could be interpreted as a sign that they are inclined to maintain higher rates if the new administration introduces inflationary policies, according to Steve Englander, head of G10 FX Research at Standard Chartered bank, as reported by AFP.
“Despite reasons to be more optimistic, they opted for a more pessimistic outlook,” he remarked. “Therefore, it seems they may have wanted to convey a particular message.”
The US central bank is mandated by Congress to independently address inflation and unemployment, but must also consider the potential impact of government policies on the economy.
Fraught Relationship
Trump and Powell have had a tumultuous relationship, with the former frequently criticizing the latter during his first term for not implementing interest rate cuts swiftly enough.
The Republican leader has also asserted that he possesses superior economic instincts compared to many Fed governors, and has argued that the US president should have a degree of influence in determining interest rates, a privilege he currently lacks.
“We have not explicitly addressed any disagreements between the White House and the Fed,” noted Bank of America senior US economist Aditya Bhave in a statement to AFP. “However, it is conceivable that they may have conflicting objectives.”
Nevertheless, Bhave highlighted the immense uncertainty surrounding the potential policy enactments, making it challenging to predict their impact.
Within Trump’s circle, there is also dissent regarding the inflationary nature of certain proposed policies.
“Fed officials are assuming that the Trump agenda will spur inflation without any evidence,” remarked Stephen Moore, an economic adviser to the president-elect and an economist at the conservative Heritage Foundation.
“During Trump’s first term, we experienced minimal inflation,” he conveyed to AFP. “It is unreasonable to suggest that tax cuts lead to inflation,” he added, referring to the incoming administration’s proposal to extend expiring tax cuts at the end of the following year.
(The article has been reproduced as is, with the exception of the headline, and is sourced from a syndicated feed.)
