Federal Reserve Chair Powell has been very firm and consistent in his messaging regarding elections and fiscal policy.

He said at a press conference two days after the election, "The election will not influence our policy decisions," and "We do not comment on fiscal policy." To ensure this, he also stated, "I will not talk about anything directly or indirectly related to the election."

However, once Trump is back in office, Powell may find it difficult to avoid considering and commenting on fiscal policy and its effects on the economy. While any agenda from the incoming president may have some impact on the economy, the unknowns associated with Trump's plans are particularly unique.

Will he really conduct mass deportations of illegal immigrants? To what extent are tariffs bargaining chips, how many will actually take effect, and what impact will these have on global trade? Will tax policies be merely extended, or will there be new, larger cuts?

Then there is the current economic backdrop. In short, the U.S. economy is solid. Even without proposals from the incoming government, the latest inflation readings (the most recent Consumer Price Index and Producer Price Index) have stagnated above 3%, while the Federal Reserve's target is 2%.

Torsten Sløk, the chief economist at Apollo Global Management, pointed out that due to the resilience of the economy, the Federal Reserve will have to maintain high interest rates for a longer period and consider the impact of fiscal policy.

Sløk stated, "If the new policies could come from three main areas: lower taxes, more tariffs, and immigration restrictions, then textbook predictions are that all these will exert upward pressure on inflation."

Of course, the Federal Reserve under Powell had already dealt with tariffs and trade issues during the first Trump administration.

In July 2019, the Federal Reserve began its rate-cutting cycle. The U.S. GDP growth rate for the second quarter that year was 3.4%, and Powell described this move at a press conference as a precautionary measure to "prevent the downside risks from global economic weakness and uncertainty in trade policy."

The Federal Reserve Chair has gone to great lengths to ensure that he is not seen as taking political action. He said, "Trade tensions do seem to have had a significant impact on financial market conditions and the economy; they are evolving in different ways, and we must keep up. By the way, I want to be clear here: we have no role in evaluating trade policy unless the uncertainty of trade policy has an impact on the U.S. economy in the short and medium term. We are not criticizing trade policy. This is really not our job."

Of course, the Federal Reserve's job is to ensure price stability and full employment. In the coming year, although Powell may be reluctant to do so, he might not be able to avoid the impact of fiscal policy on the Fed's dual mandate.

Article reposted from: Jin10 Data