Trump and the Fed: battle lines
The potential for conflict between the policies of the incoming Donald Trump administration and the Federal Reserve’s price stability mandate has been a topic of discussion since before the election. We’ve long known, in broad, vague outlines, what the new president’s policy aspirations are. Lower taxes, lower immigration, smaller current account deficits The Central Bank’s reaction to it all.
The Open Market Committee, as expected, cut its policy rate by a quarter point. The summary of economic forecasts, last seen in September, showed a 50 basis point increase in the policy rate forecast for the end of next year. It now stands at 3.9 percent, slightly more than two rate cuts from today The inflation expectation for 2025 increased by 40 basis points, reaching 2.5 percent. Perhaps more significantly, the committee’s uncertainty about inflation rose sharply, with the range of members’ inflation forecasts for 2025 widening from 30 basis points to 80 in September.
A natural question facing this change is how much the election changed the commission’s view, several reporters asked, focusing on the inflationary impact of the tariffs. Powell’s response, somewhat worryingly, had two distinct aspects. First he said this.
This is not the question before us. We do not know when we will face it. What the commission is doing now is discussing the ways in which tariffs can stimulate inflation in the economy. . that puts us in [a] position, when we see what the real policies are, to more carefully and thoughtfully assess what the right policy response is
This sounds reasonable.” Then he said this.
Some people [on the committee] took a very preliminary step and began to include highly conditional estimates of the economic consequences of policies in their projections at this meeting and said so at the meeting. Some said they didn’t and some didn’t say if they did or not…
Some revealed the uncertainty of the policy [as a reason] to write more uncertainty about inflation. And the sense of uncertainty is a kind of common sense, which thinks that when the road is more uncertain, you go a little slower. It’s not like driving on a foggy night or walking into a dark room full of furniture.
The two statements in the letter are consistent. Together, they say that while Trump’s potential policies have not entered the SEP, in spirit, they are inconsistent as expectations in the central banking system were visible in the market’s reaction yesterday. Faced with a Fed worried about Trump’s inflation and more bearish as a result, the S&P 500 fell 3 percent, 2-year Treasuries rose 14 basis points, and 10-year Treasuries rose 10 basis points.Small-cap stocks, Trump’s trading darlings , suffered a severe decline and now have abandoned all their post-election gains.
Did Fed members make the mistake of thinking they knew what Trump’s policies would be and how they would affect the trajectory of interest rates, and did they show some political bias? On both fronts, I’d say they probably have. Everyone seems to know what a second Trump administration is going to do. frameworks mean that confidence is foolish on this topic Arguments that tariffs and immigration policies should cause sustained inflation are a bit vacillating, complicating. the problem of overconfidence and it smacks of motivated judgment.
Before condemning Powell and his colleagues, however, remember three things.
One. the committee also had good non-political reasons to raise their inflation expectations. The last two consumer price index inflation figures were discouragingand growth has continued to be hotter than expected. Indeed, many experts argue that even today’s cut was wrong (imagine the market’s reaction if the committee had stopped). Some rewriting of expectations was already in order; do not overestimate the political side.
Second. no program can survive contact with the enemy. We are still in the field of waiting. The real battle between Trump’s fiscal policy and the Fed’s monetary policy has not come together, and when it does, the picture will change. You don’t have to be bloody.President Paul Volcker and President Ronald Reagan had a lively fight in the 1980s, and the country was fine.
Finally, don’t overreact. Stocks are historically high, and expectations that the Fed will cut rates next year are entrenched. In this environment, it won’t take a big hike in interest rates. That’s what Trump and Powell both need to remember.
Cars and 2025
We promised our 2025 predictions would come today, but in the face of yesterday’s Federal Reserve meeting, we got a lot of feedback about the cars that people love. They showed that Unhedged readers are a different bunch emailed simply “Ferrari 286 GTB”; another spoke fondly of the 2008 Toyota Rav4.Some kept it up to date with electric cars from Tesla and BMW; others went old school with the Volkswagen T4 camper van or the now defunct Lancia Kappa.The car industry is struggling, but people sure love their cars. the worst one you’ve ever owned. robert.armstrong@ft.com: and: aiden.reiter@ft.com:.
One good watch
FT Unhedged podcast
Can’t get enough of Unhedged?Listen? our new podcast15 minutes to dive into the latest market news and financial headlines, twice a week. Check out previous editions of the newsletter here.
English