The Fed's Difficult Balance: Dealing with Inflationary Pressures Under Trump's Policies
As we head toward 2025, Federal Reserve Chairman Jerome Powell faces a difficult balancing challenge: On the one hand, he is trying to avoid confrontation with the Trump administration; on the other hand, he has to deal with the inflationary pressure that Trump's policies may cause.
Since Trump was successfully re-elected as president, the actions of the Federal Reserve have attracted much attention. In early November, Powell announced that the Federal Reserve would not set interest rates based on assumptions about the new government's policies. However, the interest rate policy itself needs to be "forward-looking", which puts the Federal Reserve's decision-making in a dilemma.
Last week, the Federal Reserve cut interest rates by 25 basis points. Nevertheless, new forecasts show that officials expect the pace of rate cuts to slow down next year, mainly because they anticipate that price pressures will be more stubborn than previously expected. Morgan Stanley's Chief U.S. Economist Michael Gapen pointed out that the recent Fed meetings have been more 'hawkish' than expected, contradicting earlier claims of not speculating on policy.
Economic data shows that U.S. inflation has significantly cooled over the past 18 months, but Trump's policy proposals, such as increasing or imposing new tariffs and tightening immigration rules, may push prices and wages higher in the short term. Although his advisors believe that measures like deregulation and promoting energy production could offset the impact of rising commodity prices, economists remain skeptical.
Powell is trying to maintain the Federal Reserve's non-political culture, avoiding political controversies arising from colleagues' public comments, and privately urging peers to speak cautiously. However, some Fed officials still hint at a possible more abrupt policy shift.
The script from 2018 may no longer apply. At that time, Trump escalated the trade war, and the Fed ultimately cut rates, but the situation is different now. Inflation was low then, but now it is above target levels, and the fundamental economic conditions have also changed.
The impact of Trump’s commitment to strengthen border controls on the economy is still difficult to assess. Economists expect that if the new government's policies reverse the current positive supply situation, the Federal Reserve may keep interest rates unchanged. At the same time, the transmission mechanisms of rising prices and the stage of the economic cycle will affect the extent to which businesses can pass on costs, thereby impacting inflation trends. The Fed will face many complex and uncertain factors in future policy-making, requiring careful consideration to maintain economic stability.