Trump 2.0 complicates Jay Powell's rate path at the Fed

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Jerome Powell made it very clear last week that he didn’t think Donald Trump had the power to fire him, even if he wanted to.

But there was one aspect of Trump’s return to the White House that he was willing to leave as a mystery: How Trump’s proposed economic policies might affect the Fed’s expectations for a series of additional rate cuts in 2025.

“There is nothing to model right now,” Powell told reporters last Thursday after the Fed announced its second rate cut in seven weeks.

Economists say Trump’s combination of proposed across-the-board tariffs, tax cuts, and mass deportations of undocumented immigrants would put new pressure on inflation and balloon the deficit, all of which will make it more challenging for the Fed to cut rates.

A surge in Treasury yields that followed Trump’s election last week could also cause complications if it continues into next year.

Many economists are already scaling back their expectations for the number and pace of rate cuts next year on account of these proposed policies from a new Trump administration.

WASHINGTON, Jan. 24, 2018 -- File photo taken on Nov. 2, 2017 shows U.S. President Donald Trump (L) and Federal Reserve Governor Jerome Powell at a nomination ceremony at the White House in Washington D.C., the United States. U.S. Senate confirmed Jerome Powell as the next chairman of the Federal Reserve on Jan. 23, 2018. (Xinhua/Yin Bogu via Getty Images)
U.S. President Donald Trump and Federal Reserve Governor Jerome Powell at the White House in 2017. (Xinhua/Yin Bogu via Getty Images) · Xinhua News Agency via Getty Images

One is David Seif, chief economist for developed markets at Nomura. He now expects just one rate cut in 2025, with the Fed pausing rate cuts until any inflation shock from tariffs has passed. He predicts the new tariffs will lead to a "significant near-term boost" to inflation.

Capital Economics chief North America economist Paul Ashworth also now sees rates staying 50 basis points higher than previously forecast, with the Fed ending its rate-cutting campaign in the range of 3.5%-3.75%.

"The combined drag from immigration curbs and new tariffs mean that, in net terms, Trump’s return is likely to be a negative for the economy," he said.

Read more: What the Fed rate cut means for bank accounts, CDs, loans, and credit cards

Powell last week repeatedly refused to engage in a discussion about what Trump’s proposals might mean for the Fed’s current expectations of four more quarter-point rate cuts in 2025.

"We don't know what the timing and substance of any policy changes will be," Powell said Thursday. "We therefore don't know what the effects on the economy would be, specifically whether and to what extent those policies would matter for the achievement of our goal variables: maximum employment and price stability."

He said Thursday that the Fed is in no hurry to "quickly" get to neutral, a level where rates don’t slow or spur inflation, but he did admit that the Fed is "beginning to think about" slowing the pace of cuts.