The Fed's Decisions Will Get Tighter in 2025 to Counter the Market Impact of Trump's Economic Policies

 

Federal Reserve (Fed) Chair Jerome Powell plans to stabilize the Fed's independence and prevent conflicts with President-elect Donald Trump.

 

Before the November election, Powell emphasized that the Fed would not speculate on 2025’s monetary policy changes. However, recently, some officials have thought about changing policies by reducing rate cuts in 2025.

 

The latest assessments manifested the Fed's caution on monetary easing. Most officials expected only two rate cuts in 2025, lower than the previous four-cut prediction. Inflation is expected to remain at 2.5% in 2025, higher than an earlier forecast of 2.2%.

 

Morgan Stanley (NYSE: MS) chief U.S. economist Michael Gapen commented that Fed officials said they would not speculate on policy, but they still did speculate, indicating that the Fed became more hawkish than expected.

 

The turning point is Trump's intensified tariff and immigration policies. Tariffs could push up prices; stricter border controls could decrease the labor supply, driving wages up. To maintain the Fed's political neutrality and data-dependent image, Powell understated the immediate impact of Trump's victory on inflation forecasts but emphasized the uptick in inflation data. Powell emphasized on December 18 that the Committee was reviewing how tariffs would affect inflation and the economy and carefully evaluating the appropriate policy response.

 

Contrary to the Fed's concerns, Treasury Secretary-designate Scott Besant argued that tariffs could not fuel inflation because if people buy items with rising prices, they will spend less on others. Trump's advisers also reassured that inflation would be canceled by deregulation and increased energy outputs.

 

However, some analysts believe the economic environment will make companies pass on rising costs to consumers. Economist Ray Farris argued that cost increases are more likely to be passed on at full employment than in a downturn, emphasizing the uncertainty about price adjustments by firms.

 

Powell's current challenge is to manage monetary policy without being prophylactic about the potential for inflationary pressures from Trump's policies.