Some Fed officials are considering Trump’s policies as a possible source of increased inflation in 2025.
December 21, 2024 - The Washington Post
By Andrew Ackerman
The Federal Reserve is starting to contend with how President-elect Donald Trump and his ambitious policies could reignite inflation in 2025.
The central bank’s leaders strive to protect their independence from the White House and avoid commenting on politics or policy proposals. Fed Chair Jerome H. Powell had said for weeks that it was premature to discuss the degree to which the president-elect’s proposals - including higher tariffs, lower taxes and deportation of immigrants ・would factor into its decisions on interest rates.
That changed a bit Wednesday. Powell acknowledged that some Fed officials involved in forecasting interest rate cuts next year had begun thinking through the ways Trump’s fiscal policies would affect the economy. He wouldn’t say who, but he suggested that some Fed officials indicated they believe that Trump’s fiscal policies could lead to more inflation.
“Some people did take a very preliminary step and start to incorporate, you know, highly conditional estimates of economic effects of policies,” Powell told reporters at a news conference, at the ecend of the Fed’s two-day meeting.
Powell’s remarks came in response to a question about the degree to which the Fed is expecting Trump’s fiscal policies to fuel inflation next year. Without commenting specifically on Trump’s proposals, he said that there is higher “uncertainty around inflation” and that uncertainty was a reason to move slower on future cuts.
“It’s not unlike driving on a foggy night or walking into a dark room of furniture,” Powell said. “You just slow down.”
The Fed ultimately decided to cut interest rates a final time in 2024 and to scale back its plans for additional cuts next year, amid strong growth and elevated inflation. In a sign that officials are worried about inflation, the central bank also downgraded its view of how inflation will progress next year.
Although the forecasts could change, the moves suggest that Trump may not get the low interest rates he’s hoping for if he pursues the policies he’s promised, economists say.
“They are acknowledging reality,” said Joe Brusuelas, chief economist at RSM. “The risks to the outlook are clearly linked to expansionary fiscal policy, trade policy and tighter immigration policy.”
On Friday, New York Fed President John Williams said he was among the officials who had started to factor Trump’s policies into his economic projections, saying that they “are important drivers to thinking about the economic outlook.” He repeated the phrase “a lot of uncertainty” many times.
“Some of the risks to inflation are also higher because we just don’t know what’s going to happen next year,” he added, speaking on CNBC.
So far, the president-elect has shied away from publicly attacking the central bank, despite a long record of trying to influence the Fed publicly, through as many as 100 posts on the social media platform X since Powell took office, according to one accounting by Yahoo Finance. Many of these berated Powell and the Fed for failing to lower interest rates fast or far enough during Trump’s first term in office.
A spokeswoman for the Trump-Vance transition said Trump in his first term delivered a booming economy and drove down prices for families. “Starting on day one, he will once again put American workers first, lower inflation, raise real wages, lower taxes, cut regulations and unshackle American energy,” Karoline Leavitt said in a statement.
It remains unclear exactly how the Fed will react to Trump’s policies. And the extent of the discussions around Trump at this week’s Fed meeting won’t become clearer until minutes are released in January.
If tariffs are hiked to the degree Trump has promised, executives of companies that rely on foreign suppliers have said, the costs will be passed along to American consumers. Trump has long said that higher prices would be absorbed by foreign countries. But earlier this month he said he couldn’t guarantee that higher tariffs wouldn’t result in price increases in the United States, in an interview with NBC’s “Meet the Press.”
The unprecedented nature of the tariffs that Trump is contemplating make them hard to model, some economists say. They might lower federal deficits, but they could trigger slower growth and higher inflation.
A report from the Congressional Budget Office on Wednesday found that higher tariffs resembling the kind Trump has discussed on Chinese imports and all other imports could raise a key inflation gauge by 1 percent by 2026, after which the effects of the tariffs would dissipate.