There are still weeks until Donald Trump is sworn into office, but the president-elect’s pledge to enact a sweeping policy overhaul is already looming over the Federal Reserve.
The Federal Reserve cut interest rates by a quarter of a percentage point on Wednesday in its third straight rate cut, but officials said they expect to cut rates next year by half as much as they expected in September, sending the market into sharp relief. caused a change.
Fed Chairman Jerome Powell has become more cautious in his outlook for rate cuts after signs that progress in bringing inflation down to the central bank’s 2% target has stalled, while some officials doubt Trump’s expectations He said he is starting to include assumptions about the president’s policies.
Julia Coronado, a former Fed economist who now runs Macro Policy Perspectives, said that “nearly all of[Trump’s]policy It looks like flanks are going to threaten their mission.” labor market.
Coronado added that the Fed’s message is clear. “We are no longer in Trump 1.0. This is Trump 2.0, inflation is above target, and we need to get ahead of this.”
Investors and analysts said President Trump’s threats to impose tariffs, carry out mass deportations and cut taxes and regulations could have a wide-ranging impact on the economy. Some economists fear this review could lead to higher inflation, lower growth and more volatility.
Economists acknowledged that the groundwork for a slower pace of rate cuts next year was already being laid before Mr. Trump’s election victory in early November. Inflation rose above expectations in September and October, giving way to concerns about the health of the labor market that rose over the summer.
The Core Personal Consumption Expenditure Price Index, the Fed’s preferred inflation measure, is expected to rise at an annual rate of 2.8% in October and accelerate to 2.9% in November, according to a FactSet survey of economists.
Powell cited these changes Wednesday, saying the Fed needs to be more “cautious” in its actions as interest rates move closer to officials’ best estimates since the December rate cut. He also revealed that he has entered a new phase. A “neutral” level that neither slows nor accelerates growth.
The Fed’s policy settings remain “meaningfully restrictive,” but Powell made clear that further rate cuts would depend on further developments in inflation.
But Powell also signaled a significant shift in the Fed’s thinking as it considers the reforms President Trump has vowed to implement, saying the Fed won’t “speculate” or “assume” anything about its next policy. This is a departure from the position taken after the November election. The government will do it.
This was most evident in the revised version of official economic forecasts released by the central bank at the same time as the interest rate decision. Instead of the 1 percentage point cut next year that had been predicted in September, most officials were only expecting a 0.5 percentage point cut. The forecasts for 2026 and 2027 have also been reduced.
Officials also significantly raised their median inflation outlook. The “central tendency” of the core PCE price index (excluding the three highest and three lowest estimates) increased to a range of 2.5 to 2.7%. This was up from 2.1-2.3% in September.
The scale of the correction had a cascading effect on financial markets on Wednesday, sending the S&P 500 index down nearly 3%, pushing the dollar to a two-year high and pushing up U.S. Treasury yields. Asian stocks were under pressure early Thursday.
Dean Maki, chief economist at hedge fund Point72, called the Fed’s policy change “shocking” and said it was rooted in speculation about President Trump. “It’s hard to understand why we would have expected inflation to be so high if we hadn’t factored things like tariffs into our forecasts.”
JPMorgan strategists agree. “Behind the scenes, we see that tariff concerns may be permeating the Fed’s psychology,” they said.
Powell told reporters on Wednesday that some officials had taken “very preliminary steps” at this meeting to incorporate “very conditional estimates of the economic effects of the policy” into their forecasts. admitted that.
Asked directly about how the Fed was thinking about its policy response to tariffs, the chairman said the committee was “discussing the path forward” and was looking to better understand how such policies would affect the economy. He said he is working to understand it deeply.
“When we finally see what the actual policy is, we will be in a position to make a more careful and thoughtful assessment of what the appropriate policy response is.” said.
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Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said a rate cut at the next Fed meeting in January is “absolutely unlikely,” adding that policy statements have been used in the past to hint at a rate cut. He cited the fact that it contains phrases that long hiatus.
Derek Tan, an economist at research group LH Mayer, expects the Fed to hold off on further rate cuts until June and ultimately cut rates three times a year. This forecast depends on whether inflation expectations are subdued.
Tan also said he was concerned that if President Trump’s policies hurt growth, the labor market could weaken more than expected, creating complications for the Fed.
“People may be underestimating a scenario in which the labor market actually weakens and the Fed is caught between rising inflation and trying to keep the economy from sliding into recession,” Tan said. said. “It’s a double whammy.”
