The Fed can't just be 'data dependent' in 2025 — it needs to be 'policy dependent'
Julie Hyman

Federal Reserve Chair Jay Powell has been very firm and consistent in his messaging about the election and fiscal policy.

At his last post-FOMC press conference, two days after the election, he said, “The election will have no effects on our policy decisions.” And “We don’t comment on fiscal policy.” And, just to be sure, “I’m not going to talk about anything that relates directly or indirectly to the election.”

It might be tougher for Powell to refrain from considering and commenting on fiscal policy and its effect on the economy once Donald Trump retakes office. While any president’s agenda has the potential for some economic effect, there are a unique number of unknowns related to Trump’s plans.

Will he indeed impose mass deportations? How much are tariffs a bargaining chip, and how many will actually go into effect, and what will be the impact on global trade? Will tax cuts just be extended, or will there be new, deeper cuts?

Then there’s the current economic backdrop. In a word, it’s solid. Even without the incoming administration’s proposals, the latest inflation readings (most recently consumer and wholesale price indexes) have stalled out above 3%, versus the Fed’s target of 2%.

Torsten Sløk, chief economist at Apollo, already thinks that the Fed will have to keep interest rates higher for longer because of the resilience of the economy, then layer in fiscal policy on top of that. (Disclosure: Yahoo Finance is owned by Apollo Global Management.)

“If the main three areas where new policies might be coming [are] lower taxes, more tariffs, restrictions on immigration, it happens to be the case that the textbook would be predicting that all those things should be putting upward pressure on inflation,” Sløk told Yahoo Finance in an interview.

The Powell Fed, of course, has contended with tariffs and trade before, in the first Trump presidency. In July 2019, the Fed began an interest rate-cutting cycle. US GDP growth was 3.4% in the second quarter that year, and in his press conference Powell described the move as preventative, “to insure against downside risks from weak global growth and trade policy uncertainty.”

In classic Powell fashion, the Fed chair took pains to ensure he was not seen as making a political move:

“With trade tensions — which do seem to be having a significant effect on financial market conditions and on the economy — they evolve in a different way, and we have to follow them. And, by the way, I want to be clear here: We play no role whatsoever in assessing or evaluating trade policies other than as trade policy uncertainty has an effect on the US economy in the short and medium term. We’re not in any way criticizing trade policy. That’s really not our job.”

The Fed’s job, of course, is to ensure price stability and full employment. In the coming year, it may not be able to avoid addressing the impact of fiscal policy on its dual mandate, reluctant as Powell may be to do so.

Julie Hyman is the co-host of Market Domination on Yahoo Finance. You can find her on social media @juleshyman.