Federal Reserve Chair Jerome Powell expressed optimism about the U.S. economy Wednesday, citing its resilience as a reason for the central bank’s cautious approach to rate cuts. However, looming tariff policies proposed by President-elect Donald Trump could disrupt this trajectory, influencing inflation and the Fed’s future decisions.
Powell Highlights Economic Strength
“The U.S. economy is in very good shape, and there’s no reason for that not to continue,” Powell said at a New York Times event. He emphasized that the Fed could “afford to be a little more cautious” about rate decisions due to the economy’s underlying strength.
The Fed is widely expected to implement its third rate cut of the year at its December meeting. This follows a series of cuts since September in response to cooling inflation and a slowing labor market.
Tariff Proposals Could Raise Inflation
Trump’s proposed tariffs, including a 25% levy on imports from Mexico and Canada and an additional 10% duty on Chinese goods, are expected to push consumer prices higher. According to Yale Budget Lab economists, the tariffs could increase consumer prices by 0.75% in 2025, translating to an average household loss of $1,200 in purchasing power (in 2023 dollars).
While some substitutions to domestic goods could soften the impact slightly, economists warn that alternatives may not be available for all tariffed products, leaving consumers exposed to higher costs.
Fed Officials Advocate a Wait-and-See Approach
Fed officials, including Governor Adriana Kugler and Atlanta Fed President Raphael Bostic, have stressed the importance of waiting for concrete policy actions before modeling the potential economic effects of Trump’s tariffs.
“Studying the specifics, when they come out, will be important, as trade policy may affect productivity and prices,” Kugler said. Bostic added that frequent changes to proposed policies make premature modeling inefficient.
A December Rate Cut?
Wall Street anticipates a 76% likelihood of the Fed reducing rates by a quarter point at its December meeting. Powell has acknowledged that inflation remains slightly above expectations, though the Fed continues to see a general downward trend toward its 2% target.
Fed Governor Christopher Waller said he leans toward supporting a rate cut but noted the decision hinges on whether upcoming data significantly alters inflation forecasts.
Threats to Fed Independence
Beyond economic policy, the Fed may face challenges to its independence under Trump’s administration. A Wall Street Journal report revealed that Trump’s advisers drafted plans to increase presidential influence over the central bank’s interest rate decisions.
Powell underscored the importance of Fed independence, stating, “The independence of the Fed is essential to the sanctity of the U.S. dollar.” Investors and economists widely regard the Fed’s autonomy as critical for maintaining market confidence and data-driven policymaking.
What’s Next for the Fed?
As the Fed navigates the dual challenges of inflation and political pressure, Powell remains optimistic about maintaining a constructive relationship with the incoming administration. However, Trump’s economic policies, including tariffs and potential encroachments on the Fed’s independence, could significantly shape the central bank’s decisions in the years ahead.
