Written by Howard Schneider
WASHINGTON (Reuters) – Within weeks of Donald Trump’s 2016 election, U.S. Federal Reserve policymakers have begun weighing the impact of expected tax cuts and tax cuts on the economy, writing down bleak forecasts of what’s to come, with some concluding that higher interest rates are needed to stem the downturn. of money.
That included Jerome Powell, the former Fed governor and now the central bank chairman who is largely responsible for setting the course of monetary policy in the first 16 months of Trump’s next term. The former Republican president defeated Democratic Vice President Kamala Harris in last Tuesday’s election and will be sworn into office in January 2025.
Minutes of the Fed’s Dec. 13-14, 2016, before Trump took office, shows that Powell then said that due to the “expansionary fiscal environment” expected under the incoming administration “some policy may be necessary.”
The Fed at that meeting raised its policy rate for the first time since last December, an increase that was telegraphed before Trump’s victory over Democrat Hillary Clinton. But, for a variety of reasons, policymakers have increased the expected pace of rate hikes in 2017, and continue to deliver three rate hikes over the next 12 months instead of the two expected before Trump’s election.
The Fed now faces a similar period of uncertainty and potential tensions with a second Trump administration as central banks test how much and how quickly they can cut interest rates while keeping inflation at bay.
The economic measures that Trump promised during the recent campaign are in line with what he promised in 2016 – including more tax cuts, tariffs, and tougher immigration policy. Now, however, they will enter the economy in a very different context, arguably with inflationary risks still lingering.
Minneapolis Fed President Neel Kashkari, in televised interviews Saturday and Sunday, noted that more people may be deported to disrupt other businesses. Meanwhile, rising prices, if they trigger a “tit for tat” response from other nations, “could be more affected,” he said, potentially leading to higher prices.
“We will have to wait and see what will be used,” Kashkari said. “Right now we’re all guessing.”
‘THE POOR CONTINUES’
Inflation was a key issue in Trump’s campaign against Harris, but he now faces the daunting task of delivering on a set of expansionary promises in an economy that is close to or perhaps overstretched without reigning in the rising rates he opposes.
Economic activity in 2016 was hampered by sluggish labor markets and the broader economy, with the Fed hoping that very low inflation could pick up. Now the economy is coming into a period of labor shortages, the effect is more than likely, and the Fed is watching for any signs price pressures are building again.
Although Powell at a press conference last Thursday said that Trump’s election will not have a “close” impact on monetary policy, if 2016 is a guide when first-time workers estimate how high prices, tax cuts, and the loss of some foreign-born workers could be. to influence the view that may be presented when the Fed meets next on December 17-18.
While reluctant to comment on the substance of Trump’s plans, central bankers may have already begun rethinking how quickly and how far to cut interest rates next year. That could put them on an early collision course with the new administration if “Trump 2.0” policies are seen as raising the risk of inflation that the Fed has been fighting for more than two years to beat.
For now, Bank of America analysts wrote that, the Fed will take an “ambivalent” approach and continue to cut interest rates aimed at making policy less restrictive in allowing for a sharp drop in inflation starting in 2022.
But those blinders may soon fall. Fed staff at the December 2016 meeting had already begun estimating what the tax cuts and tax cut proposals would mean, and noted the higher interest rates they might seek.
SCENE AND DESTINATION
At the December meeting, policymakers will update their economic projections, indicating that they still think rates can fall as much as they had expected at the September meeting. Then the average rate will drop to 2.9% sometime in 2026. After a quarter-point cut at last Thursday’s meeting, the rate is now in the 4.5% to 4.75% range.
While Powell said the basic view remained that monetary policy would gradually reach a “neutral” position, he noted that the “pace and place” remained to be determined.
Powell’s comments at the press conference led away from any direct discussion of the election or Trump, who nominated Powell to be the chairman of the Fed but later called him an “enemy” for pursuing a monetary policy that Trump considered too strict and interfering with his economic plans.
But the Fed chairman, whose current term runs through May 2026, also provided a kind of closing moment and a precursor to what’s to come.
He noted a powerful paradox that may appear to be deciding the just-concluded presidential vote. After dealing with a once-in-a-century pandemic, the economy was in good shape, Powell said, but people’s ideas weren’t there.
The challenge now is to keep things on track.
“It’s actually surprising how well the US economy has done, with strong growth, a strong labor market, low inflation,” Powell said.
“We also know that people are still feeling the impact of prices… It stays with you, because the price level does not go down. What is needed is to get real wages for years so that people feel better… We are on the way to create that… What needs to happen is happening and for the most part it has happened, but it will take time before people regain their confidence and feel that.”
