Donald Trump’s recent election win is expected to complicate the Federal Reserve’s ability to balance economic growth and inflation. Trump’s plans for significant tariffs and strict immigration policies are widely considered inflationary, as these moves could drive up prices and wages. Markets have already responded, with Federal Reserve futures and Treasury yields adjusting to these potential economic shifts. Economists are concerned that the Fed may now face higher inflation while it is in the midst of easing interest rates, which presents a dilemma since the Fed’s main tool to control inflation traditionally involves raising rates.
The Fed’s immediate response, according to futures data from the CME FedWatch tool, includes an anticipated 25-basis-point rate cut this week. However, the likelihood of another similar rate cut in December has dropped from 83% to 71%, and the probability for a cut in January has also declined. Treasury yields surged in response to the election, with the 10-year yield climbing by 21 basis points and the 30-year yield experiencing its largest increase since March 2020. Glen Smith, the Chief Investment Officer of GDS Wealth Management, suggested that the upcoming rate cut might be the last one for an extended period. He noted that the Fed’s remarks about future rate cuts are now critical for markets, especially given the recent jump in yields driven by expectations of increased government spending and larger deficits.
Before the election, economists warned that Trump’s agenda, which includes up to 20% tariffs on imports and 60% tariffs on goods from China, could trigger higher consumer prices. His immigration policies may also raise wages, as a reduced labor supply could put upward pressure on salaries. Nobel laureate Paul Krugman called Trump’s tariff proposals a “significant inflationary shock.” However, inflation’s trajectory remains uncertain, as consumer prices remained relatively steady during Trump’s first term, despite a trade war with China. Trump’s new term could see even more aggressive tariff strategies targeting multiple countries.
Trump’s influence on the Federal Reserve might not stop at policy pressures. Reports indicate that Trump’s allies are considering efforts to limit the Fed’s independence, potentially by involving the president in the rate-setting process or even by attempting to remove current Fed Chair Jerome Powell before his term ends in 2026. Analysts from the Peterson Institute for International Economics warn that tampering with the Fed’s autonomy could cost the U.S. economy $300 billion and lead to increased inflation. With the Fed’s next meeting on the horizon, some anticipate Powell may address the challenges posed by Trump’s policy agenda. However, economists from Pantheon Macroeconomics suggest that Powell will likely adopt a neutral tone to safeguard the Fed’s independence in the coming years, avoiding direct speculation on the future direction of policy under Trump’s influence.
