Federal Reserve Chairman Jerome Powell made it clear last week that even if Trump wanted to fire him, he did not believe Trump had the authority to do so.
However, there is one aspect he did not address, namely how Trump's proposed economic policies might affect the Fed's expectations for a series of additional rate cuts in 2025.
After the Fed announced its second rate cut of the year last week, Powell told reporters, “There’s nothing to simulate at this point.”
Economists say that Trump's proposed comprehensive tariffs, tax cuts, and mass deportation of undocumented immigrants would put new pressure on inflation and widen the deficit, all of which would make it more difficult for the Fed to cut rates.
After Trump's election last week, U.S. Treasury yields soared, and if this situation persists into next year, it could lead to a complicated scenario.
Many economists have begun to lower their expectations for the number and pace of Fed rate cuts next year due to these policies proposed by the new Trump administration.
One of them is David Seif, Chief Economist for Developed Markets at Nomura Securities, who now expects the Fed to cut rates only once in 2025 and then pause until any inflation shocks from tariffs have passed. He predicts that the new tariffs will lead to “a significant rise in inflation in the short term.”
Paul Ashworth, Chief North America Economist at Capital Economics, now also expects rates to be 50 basis points higher than previously forecast, with the Fed ending its rate cuts in the range of 3.5%-3.75%.
He stated, “The combined drag of immigration restrictions and new tariffs means that, in net terms, Trump's return is likely to be detrimental to the economy.”
Powell again refused last week to discuss how Trump's proposals might impact the Fed's current expectation of four additional 25 basis point rate cuts in 2025. He said, “We don’t know the timing or substance of any policy changes. Therefore, we also don’t know what the impact on the economy would be, especially whether and to what extent these policies would affect our goals: maximum employment and price stability.”
At that time, Powell indicated that the Fed was not in a hurry to reach a “neutral” level, where interest rates neither slow down nor stimulate inflation, but he did acknowledge that the Fed was “beginning to consider” slowing the pace of rate cuts. “We’ve reached a point of slowing down, just like an airplane slows down when it reaches the airport.”
He declined to reveal what might happen at the Fed's last meeting in December 2024, saying, “We can only see where the data takes us. We have six weeks of data to look at.”
Investors may have to wait until that meeting for new clues about how Powell and his colleagues view the situation they will face next year. At that time, Fed officials will provide new estimates on rate cuts, inflation, and economic strength for 2025 and beyond.
JP Morgan Chief Economist Michael Feroli stated, the election results “may slightly reduce the likelihood of a rate cut in December, as the appreciation of risk assets could be a factor in the discussion.”
He currently believes that the Federal Reserve will cut interest rates once every quarter after December, with the first cut likely occurring in March next year, continuing until the federal funds rate drops to 3.5%.
<h2>Familiarity</h2>
This is not the first time the Federal Reserve has found itself struggling to cope with the effects of Trump’s policies; it was the same during its last meeting in December 2016, when Trump had already been elected but had not yet taken office.
According to Deutsche Bank Securities' Chief U.S. Economist Matthew Luzzetti, the December 2016 Federal Reserve meeting did indeed reflect anticipated changes in fiscal policy under the new government.
Based on the minutes and records of that meeting, the Federal Reserve staff incorporated a 1% tax cut assumption into their forecasts, along with adjustments to fiscal policy, which raised the staff's assumption of the neutral interest rate (the rate that neither stimulates nor suppresses growth) by 25 basis points.
In fact, the minutes of that meeting indicated that “about half” of the officials reflected adjustments to fiscal policy in their baseline outlook, but “almost all” pointed out that these policies shifted the risk distribution toward stronger growth outcomes. “Many” believed that these policies “might require slightly tighter monetary policy than currently expected.”
Not all economists predict that Trump’s policies will produce immediate changes. EY Chief Economist Greg Daco does not expect the trade and tax policies proposed by Trump to have a significant impact before the end of 2025 and believes the short-term effects are minimal. He stated that many potential shocks to the economy depend on the magnitude of policy shifts.
If the new government imposes comprehensive tariffs on all trading partners and a 60% tariff on Chinese imports, he believes the impact would be more severe, with U.S. GDP declining by 2.5% and inflation soaring by 1.5%.
In this scenario, these changes would lead to an average income loss of $1,145 per household, with low-income families being the most affected.
Taking into account changes in immigration, regulation, trade, and tax policies, Daco believes that U.S. economic growth will decline from 2.7% this year to 2% next year, and then to 1.7% in 2026. He expects inflation rates to drop to 2.3% in 2025 and 2026.
However, like other economists, he expects the number of rate cuts by the Federal Reserve to decrease and the pace to slow, with the Fed cutting rates once between every two meetings in 2025. He anticipates a total rate cut of 100 basis points, down from a previous expectation of 150 basis points. In an interview, he said:
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“What we are doing is not necessarily integrating every campaign promise, but rather establishing a new baseline that seems likely, which will incorporate targeted tariffs and more transactional tariffs aimed at certain economies and industries.”
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Trump's economic policies may affect the Federal Reserve's expectations for interest rate cuts. Powell stated that Trump's proposals may not necessarily lead to rate cuts; instead, they could increase inflationary pressures due to comprehensive tariffs and immigration policies, complicating the rate-cutting process. Economists have begun to lower their expectations for the number of rate cuts by the Federal Reserve, believing that Trump's policies could pose adverse effects on the economy. Powell declined to discuss the specific impact of Trump's policies on rate cuts but acknowledged that the Federal Reserve is considering slowing down the pace of rate cuts

- Federal Reserve Chairman Jerome Powell stated that he does not believe Trump has the authority to dismiss him, but did not address how Trump's proposed economic policies might affect expectations for future rate cuts.  
- Economists warn that Trump's policies, including tariffs and tax cuts, could increase inflation and widen the deficit, complicating the Fed's ability to lower rates.  
- Many economists have revised their forecasts for the Fed's rate cuts in 2025, with expectations now suggesting fewer cuts and a higher terminal rate due to potential inflationary pressures from Trump's policies.

Trump 2.0 is complicating the Federal Reserve's interest rate cut path!