Federal Reserve Chairman Jerome Powell recently stated that he does not believe President Trump has the authority to dismiss him, despite Trump's apparent desire to do so. However, Powell has remained silent on how Trump's proposed economic policies might influence the Fed's expectations for a series of additional rate cuts in 2025.
Following the Fed's announcement of its second rate cut this year, Powell indicated there is currently nothing to simulate regarding Trump's policies. Economists predict that Trump's proposed comprehensive tariffs, tax cuts, and large-scale deportation of undocumented immigrants could create inflationary pressures and widen the deficit, making rate cuts more challenging for the Federal Reserve.
After Trump's victory, U.S. bond yields surged, and if this trend continues, it could complicate matters further. Many economists, including Nomura's Chief Economist David Seif, have lowered their expectations for the Fed's rate cuts in the coming years due to these anticipated policies.
Seif now expects the Fed to cut rates only once in 2025, pausing afterwards until any inflationary impact from tariffs subsides. Capital Economics' Paul Ashworth predicts higher rates than previously forecast, expecting the Fed to conclude its rate cuts within a 3.5%-3.75% range.
Powell has avoided discussing the potential impacts of Trump's proposals on the Fed's forecast of four more 25 basis point rate cuts in 2025. He emphasized that the timing and nature of any policy changes are uncertain, and their impact on employment and price stability remains unknown.
The Fed is not eager to reach a neutral rate quickly, which neither slows nor stimulates inflation, but is considering slowing its pace of rate cuts. Powell likened it to an airplane slowing down upon reaching an airport. Decisions for the December 2024 meeting remain undetermined as the Fed continues to analyze data.
Investors may have to wait for new insights into how Powell views the future situation, with updated estimates on rate cuts, inflation, and economic strength anticipated at the December meeting. JPMorgan's Chief Economist Michael Feroli mentions that the election outcome might slightly reduce the likelihood of a December rate cut, as the appreciation of risky assets could be a discussion factor.
This situation is reminiscent of 2016 when the Fed was navigating policy impacts following Trump's election. At that time, changes in fiscal policy were anticipated, leading to adjustments in Fed staff's neutral rate assumptions.
Not all economists foresee immediate impacts from Trump's policies. EY's Chief Economist Greg Daco doesn't expect substantial effects from trade and tax policies before 2025's end, though significant changes, such as broad tariffs on all trade partners, could drastically affect GDP, inflation, and household incomes.
Daco and others anticipate fewer and slower Fed rate cuts, with expectations of 50 basis points of cuts, reduced from prior forecasts of 100 basis points. Adjustments are based on possible targeted tariffs and changes in trade policies, rather than incorporating every campaign promise.
