A looming danger for the Fed
Whether Republican Jerome Powell voted for Donald Trump in the US presidential election remains unknown. If he did, it would be a misstep. Trump has openly threatened to remove Powell as Chairman of the Federal Reserve, and has undermined the Fed's independence as an institution. Beyond that, Trump is likely to make life difficult for the central bank.
Trump’s tariff plans could trigger a significant inflationary surge in the US by 2026, potentially reversing the recent hard-won decline in inflation. Additionally, plans to lower corporate taxes and pursue expansive fiscal policies would likely cause prices in the US to rise. According to economists, depending on the model and how exactly Trump implements his proposals, inflation could increase by up to two percentage points.
Pressure on the Fed
In the short term, Trump's election victory is unlikely to impact the Fed’s monetary policy. Powell emphasised this after the recent rate decision, noting that he wasn’t willing to comment extensively on developments around the White House. Whether the Fed will ease rates again in December or pause will depend on the state of the US labour market by then, and how the inflation outlook develops, independent of Washington's political shifts.
However, by 2025, it seems possible that Trump's economic policies will result in one to three fewer rate cuts by the Fed. This is not certain, though, as predicting Trump's actions is particularly challenging due to his erratic nature. Furthermore, his protectionist trade policies could spark a global trade war, which would likely slow US economic growth. Reduced economic activity would, in turn, ease inflationary pressures.
High uncertainty
Trump has increased uncertainty and risks for monetary policy, not just for the Fed, but for nearly all central banks worldwide. The European Central Bank (ECB) is also giving serious thought to these matters, and has voiced concerns more openly than the Fed. ECB Vice President Luis de Guindos has warned of harmful shocks to inflation and growth. It’s entirely possible that this will come to pass.
