Trump’s victory creates greater uncertainty for the Federal Reserve

WASHINGTON — Donald Trump’s victory in the Nov. 5 presidential election brings deep uncertainty to the U.S. economic outlook that could change the Federal Reserve’s policy calculus in the coming months while raising questions about how firmly he can press the central bank during his second term. to the White House.

On the campaign trail, Trump promised to more aggressively pursue tariffs against U.S. trading partners, deport millions of undocumented immigrants and extend his 2017 tax cuts. By many estimates, these policies, if enacted, could put upward pressure on prices, wages and the federal budget deficit.

That would complicate the Fed’s job as officials seek to bring inflation down to its 2 percent target while protecting the labor market. Amid this delicate task, the central bank could find itself in an uncomfortable political spotlight if Trump follows his previous pattern of publicly criticizing Fed Chairman Jerome Powell.

Fed officials are expected to cut benchmark interest rates by a quarter of a percentage point on Nov. 7, hot on the heels of a half-point cut in September. They forecast another quarter-point cut this year in December, and another full-point cut in 2025, according to the average estimate released in September.

Policymakers, however, may now approach the question of when and how much to cut more cautiously as they assess how Trump’s economic proposals will translate into actual policy, said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics.

“They may think we could get a higher risk of inflation over the next few years due to tariffs or lower immigration,” Mr Tan said. “Their psychology may be, ‘Taking the contraction a little slower will give us a little more time to see what’s actually happening with inflation expectations and the labor market.’

Mr. Powell will almost certainly face questions about how the election will affect the Fed’s prospects when he holds a news conference at 2:30 p.m. on Nov. 7 following the Federal Open Market Committee meeting this week.

The Fed chairman frequently drew Trump’s ire during his first term. The barbs continued: As recently as August, Trump said Powell had made policy decisions “a little too early and a little too late.”

Have the right to vote

Trump also said he believes presidents should have a say in the Fed’s interest rate policy and suggested policymakers were acting for political reasons when they cut rates by half a percentage point more than usual in September.

In an October interview with Bloomberg News editor-in-chief John Micklethwaite, Trump subsequently said he didn’t think he could tell the Fed what to do but had the right to comment on the direction of interest rates.

However, all of his rhetoric has fueled speculation that he might try to limit the Fed’s autonomy and undo decades of practice allowing the central bank to conduct monetary policy independently of the executive branch.

During Trump’s first term, he considered firing Powell, a move that legal scholars say would be unprecedented and legally questionable.

The Fed has guardrails that can protect it from presidential interference. Presidential appointments to the Fed’s Board of Governors must be confirmed by the Senate, and congressional committees, for example, provide oversight of the central bank.

Mr. Powell and other officials have repeatedly assured the public that they seek to stay out of partisan politics and do not take political considerations into account when setting monetary policy.

Sowing Doubts

Still, the president’s public and vocal criticism of the Fed could sow doubt, said Sarah Binder, a political science professor at George Washington University.

“Of course there is structural independence,” Ms. Binder said. But “no amount of structural insulation can protect him if people begin to doubt that he will do what he promises.”

Some of Trump’s advisers have dismissed concerns that he might try to interfere in the Fed’s affairs.

“My impression is that he doesn’t want to be in the room. He just wants to be a voice that is heard,” said Scott Bessent, Trump’s top economic adviser and chief executive of hedge fund Key Square Group.

“He understands that central bank independence anchors long-term inflation expectations, which anchor long-term rates,” he said in an October interview with Bloomberg News.

Kevin Hassett, who served as chairman of the White House Council of Economic Advisers during Trump’s first term, said in an interview with Goldman Sachs published in October that suspicions of coordination between the Fed and the executive branch “should be taken seriously and the next administration should choose neutral Fed leadership.” ”

Trump’s most direct way to influence the Fed will be through the appointment of key staff in the coming years.

He has already said he will not reappoint Powell, whose term as chairman expires in May 2026. Fed Chair Adriana Kugler’s term expires in January 2026, while Governor Powell’s position will open in January 2028. Trump will have the opportunity to name appointees for each of these positions.

Several sources close to the Trump campaign, including Mount Bessent, said Mr. Hassett could eventually become Trump’s chairman nominee.

The president-elect will also be able to appoint a vice chairman for supervision, a powerful regulatory function that oversees the nation’s largest banks.

President Joe Biden filled the post with Michael Barr, whose term expires in July 2026. Mr. Barr drew sharp criticism from the banking industry and Republicans over the initial proposal to increase the capital that banks must retain. The Fed and other regulators are now reviewing the plan.

Barr’s recent incumbents resigned shortly after the election of a president from the opposite party, Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., wrote in an October research note.

If Mr. Barr “follows this precedent after Trump wins, then the new president could quickly influence regulatory policy, even if his influence on monetary policy is less immediate,” Feroli said. BLOOMBERG