The Federal Reserve isn’t making any guesses this time around. Unlike the Fed’s approach during Donald Trump’s first win in 2016, Chair Jerome Powell is waiting to see the fine print of the incoming administration’s economic plans before acting.
At his November 7 press conference, the Fed chair said: “There’s nothing to model right now. We don’t guess, we don’t speculate and we don’t assume.”
Back in 2016, the Federal Reserve didn’t sit on its hands. Before Trump even took office, the Fed’s team began forecasting how his promised tax cuts would boost growth, with the downside being higher interest rates.
Powell, a governor at the time, didn’t hesitate to bake those assumptions into his forecasts. He called for a 1% GDP personal income tax cut as a placeholder and adjusted his interest rate outlook for 2017, switching from two hikes to three.
Why Powell is playing it safe
This time, Powell is treading cautiously, and it’s not hard to see why. Trump’s economic policies—whether tax cuts, deregulation, or tariffs—could create an economic jolt, but they also bring risks. Inflation is still a problem.
The Fed has spent the past two years grappling with its worst inflation battle in decades. Any misstep could undo progress. Randall Kroszner, a former Fed governor, noted that the economy could get a short-term boost from Trump’s business-friendly policies, but inflation remains a threat.
“The job’s not quite done,” Kroszner said, adding that the Fed’s immediate challenge will be balancing growth with price stability. The central bank can’t afford to move too soon—or too late.
Tighten monetary policy too early, and the Fed risks stifling growth before it even starts. But hesitate for too long, and inflation could skyrocket, repeating the nightmare of 2021. That’s the tightrope Powell is walking.
The Fed’s hesitation also comes from lessons learned during Trump’s first term. In July 2019—barely 19 months after Trump’s signature tax cuts—the Fed had to reverse course and cut rates. Manufacturing had slowed, and inflation had fallen below its 2% target. The mixed results of those tax cuts still linger in the minds of policymakers.
Politics loom over the Fed’s calculations
Powell’s careful strategy also reflects the political risks of dealing with fiscal stimulus. Central bankers have been caught in the crossfire of administrations before. Historically, they’ve faced criticism for raising rates “too soon” and smothering growth—or for acting “too late” and letting inflation run wild.
Laurence Meyer, a former Fed governor, thinks the Fed’s response should stay low-key for now. “They should be running alternative simulations,” he said, suggesting that staff-level forecasts are the safest approach. Meyer argued against making big policy decisions based on unknowns.
Others aren’t so sure. Trump has already promised another round of tax cuts, and with Republican control of Congress, extending his first-term cuts seems likely.
Wall Street isn’t waiting around. Since Trump’s re-election, banks like JPMorgan Chase, Barclays, and Toronto-Dominion have slashed their rate cut forecasts for next year. Investors are also adjusting expectations for 2025, betting that Trump’s policies will strengthen the economy enough to limit monetary easing.
The Fed’s critics, however, are sharpening their knives. Trump’s economic agenda is set to collide with Powell’s caution, and it’s not just about interest rates. The clash could redefine how the Fed operates and whether it can adapt to new economic realities.
The Fed’s flawed models
One of the biggest criticisms facing the Fed is its reliance on outdated economic models, particularly the Phillips curve. This model assumes a trade-off between inflation and unemployment: lower one, and the other rises.
But the past few years have shredded that theory. Inflation surged to its highest levels in 40 years, even as unemployment stayed low.
The Fed’s insistence on clinging to the Phillips curve has drawn fire. Critics argue that the model oversimplifies a complex economy and fails to address real-world inflation drivers.
Not all inflation is created equal. Nonmonetary inflation—caused by events like natural disasters, wars, or even supply chain disruptions—is beyond the Fed’s control. Raising rates won’t fix port bottlenecks or rebuild factories.
Monetary inflation, on the other hand, stems from excess currency supply. The solution? Stabilize the dollar’s value. But the Fed rarely talks about currency stability. Instead, it focuses on slowing the economy through rate hikes, a strategy that critics compare to rent control—inefficient and often counterproductive.
The second Trump administration is almost likely to feature a battle with the Federal Reserve, and it won’t be pretty. Powell’s focus on “fiscal sustainability” puts him on a collision course with Trump’s growth-first agenda.
Critics have already called out Powell’s silence during Biden’s deficit spending spree, questioning why he’s taking a harder line now.
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