Trump's Return to Power Creates Uncertainty for Fed’s Rate Path in 2025

Jerome Powell, the Chairman of the Federal Reserve, has made it clear that Donald Trump doesn’t have the power to fire him, but as Trump returns to the White House, the economic landscape might prove more complicated for the Fed. With Trump’s economic proposals—including across-the-board tariffs, tax cuts, and tough immigration policies—looming large, the Fed’s expectations for rate cuts in 2025 are now under scrutiny.

Trump's policies may exacerbate inflation and balloon the national deficit, making it harder for the Fed to lower interest rates as initially planned. Following Trump’s election victory, a surge in Treasury yields raised additional concerns for the central bank, with many economists now scaling back their predictions for the pace and number of rate cuts.

A Shift in Economic Forecasts

Economists such as David Seif, Chief Economist at Nomura, have revised their forecasts, now predicting only one rate cut in 2025, with the Fed holding off on cuts until the inflationary effects of Trump’s tariffs have been addressed. These tariffs are expected to have a "significant near-term boost" to inflation, pushing the Fed to be more cautious.

Similarly, Paul Ashworth of Capital Economics has raised his expectations for interest rates, projecting the Fed's rate cuts to slow significantly. As a result, interest rates may remain about 50 basis points higher than originally forecast, meaning the Fed’s rate-cutting cycle could end within the 3.5%-3.75% range.

Trump’s Policy Impact on the Fed

While Powell has refused to engage in discussions about how Trump's economic proposals will affect the Fed’s policy trajectory, his statements last week emphasized that the Fed will remain data-dependent in its approach. Powell stressed that the Fed doesn’t yet know the full extent of how Trump’s policy changes will impact the economy, particularly in terms of inflation and employment goals.

"We don’t know the timing or substance of any policy changes, so we can’t model it yet," Powell said. He further noted that the Fed is "beginning to think about" slowing the pace of rate cuts, signaling that a more gradual approach to easing may be on the horizon.

The Return of Inflation and Fiscal Challenges

Trump’s return to the White House could bring significant changes to trade and immigration policy. His proposed tariffs on foreign goods and a potential clampdown on immigration could create inflationary pressure, putting the Fed in a challenging position as it seeks to curb inflation while stimulating economic growth.

JPMorgan’s Michael Feroli sees the election outcome lowering the odds of an immediate rate cut in December 2024. While he expects the Fed to resume easing by March 2025, he now anticipates rate cuts to occur at a slower pace, with the Fed funds rate reaching 3.5% by the end of 2025.

Echoes of 2016: A Familiar Scenario

This isn’t the first time the Fed has found itself in this position. Back in December 2016, after Trump’s election, the Fed also had to adjust its outlook in light of anticipated fiscal changes. In that instance, the Fed considered tax cuts and other policy shifts when predicting future interest rate trends.

Economists like Greg Daco, Chief Economist at EY, predict that the full impact of Trump’s proposed policies won’t be felt until late 2025, though some potential shocks—such as blanket tariffs—could trigger a significant economic slowdown. Daco warns that GDP growth could fall by 2.5%, with inflation rising by 1.5% if Trump’s tariffs are implemented.

Despite these concerns, Daco believes the Fed will continue to cut rates at a slower pace, with only 100 basis points of cuts in 2025, down from the previously anticipated 150.

Looking Ahead

As the Fed evaluates the evolving economic landscape, it remains to be seen how Trump’s policy proposals will affect inflation and growth—and ultimately, the path of interest rates. With many economists revising their expectations, it’s clear that Trump’s return to office could introduce new complexities for both the U.S. economy and the Fed’s monetary policy decisions in 2025 and beyond.

In the coming months, investors will be watching closely as Powell and his colleagues update their projections. The economic outlook could shift dramatically depending on the scope of Trump’s economic policies and their impact on inflation, growth, and employment. As always, the Fed will adjust its course based on the data at hand, but the uncertainty around Trump’s plans leaves much to be determined.