With days to go until the inauguration of President-elect Donald Trump, all eyes are on the economic impact of his policies.
In recently released minutes from a December meeting of the Federal Reserve’s rate-setting body, the Federal Open Markets Committee (FOMC), officials anticipated risks of higher-than-expected inflation, partly driven by potential tariffs from Trump, as they made a “finely balanced” decision to lower interest rates. The Fed's last move — a quarter-point rate cut — marked the third and final cut of 2024 amid strong-enough economic growth and slowly fading inflation.
Fed Chair Jerome Powell noted during a press conference that “conditions in the labor market are now less tight than they were in 2019,” and that interest rate cuts would occur more slowly in 2025.
With Trump's presidency imminent, the Fed seems to be adopting a “wait-and-see” approach to further rate cuts, according to Brett House, Professor of Professional Practice at Columbia Business School’s Economics Division.
While unemployment rates have risen mildly from historic lows and inflation remains above target, Trump’s proposed tariff and immigration policies are likely to drive price pressures up, according to House. This, combined with Trump’s indication that he expects to have greater say in setting policy rates, could make it even more difficult for the Fed to get policy rates down further.
To make better sense of this dynamic, as well as the Fed’s outlook for 2025, House spoke with CBS Insights to shed light on what Americans can expect.
CBS: What is the Fed’s reasoning for a 25 basis points (bps) cut, and can we expect more cuts in 2025?
Brett House: The FOMC delivered a hawkish 25 bps cut accompanied by updated projections that show fewer rate cuts anticipated in 2025, along with higher inflation, lower unemployment, and slightly stronger growth.
The Committee made it clear that the bar for further cuts is higher than it’s been for the 100 bps of cuts that have been delivered since September: a relatively new member of the Committee voted against the most recent cut and three non-voting members also appear to have opposed it.
The past year’s cuts have reflected the Fed’s assessment that monetary policy has been weighing on economic activity. Its models have implied that lower real interest rates have been necessary to preserve the economy’s post-pandemic soft landing and job market strength.
Nevertheless, the economy has remained more robust than expected, with relatively high real GDP growth rates, strong consumer spending, unemployment rates just above historic lows, and headline inflation rates that remain above the Fed’s average 2% year-on-year target. The Fed is now adopting a wait-and-see or data-dependent approach that will deliver further rate cuts only if emerging economic indicators imply that lower rates are necessary to support growth and would not conflict with inflation coming down to the Fed’s target.
CBS: How are President-elect Trump’s policy proposals likely to affect inflation and what do they mean for future rate cuts?
House: The incoming administration’s policy proposals are likely to increase upward price pressures and limit the extent to which the Fed can deliver on additional rate cuts in 2025. Significant tariffs on imports from Canada, China, and Mexico—the United States’ three biggest trading partners—will push up prices for American businesses and consumers.
Throttling immigration inflows and deporting workers will increase costs for key sectors in the US economy, such as agriculture and construction. These cost increases will be passed onto business and consumers in the form of higher final prices.
Without any clarity on complementary decreases in federal spending, new and continued tax cuts are likely to lead to larger federal deficits. This will boost aggregate demand without increasing aggregate supply, ratcheting up prices further.
President-elect Trump’s push to reduce regulatory burdens might offset some of these price pressures by making it easier for businesses to operate. But, on balance, the Trump agenda is likely to make it harder to get inflation down, which would curtail the Fed’s rate-cutting path.
CBS: What are the implications for businesses and consumers?
House: Cuts in the fed funds target rate don’t necessarily translate into lower borrowing costs for businesses and consumers, particularly because this most recent cut, as well as a series of future cuts, have already been anticipated by bond markets. The cost of servicing variable-rate loans, such adjustable-rate mortgages, home-equity credit lines, credit-card balances, and some business borrowing, will come down, which will create a little easing in budgets. But interest rates on most fixed-rate mortgages and car loans are benchmarked to US Treasury yields, and these rates have risen since the Fed’s initial 50 bps cut in September. Similarly, the reference rate on new student loans was set in July and isn’t affected by the Fed’s cuts this autumn.
CBS: What can the policies and economy from President-elect Trump’s first term tell us about his second?
House: A comparison of the two Trump terms is not straightforward as economic conditions now are quite different from both 2017 and the period of the pandemic-induced shutdowns. During President-elect Trump’s first term, far more policy changes tended to get mooted on late-night posts to social media, in off-the-cuff musings, and in casual statements than were delivered by the White House. For instance, the first Trump administration vowed to completely change US trade policy, but it produced a renegotiated NAFTA that was only mildly altered from the original agreement. On fiscal policy, the first Trump administration’s biggest achievement was the passage of revenue cuts under its Tax Cuts and Jobs Act, with little to show for the White House’s repeated promises to support infrastructure development.
As others have observed, the President-elect’s major appointments look quite different this time around than they did in his first administration: they generally have less experience in running the bureaucratic structures they are being handed. On the one hand, this positions them as less likely to respect norms and settled precedents, with a view to pushing through substantial changes. On the other hand, their more limited experience could make it harder for them to achieve the reforms they seek.
CBS: How do you anticipate President-elect Trump and Fed Chair Powell will interact in the first 100 days or so of the presidency?
House: The Executive and Legislature are typically expected to keep some distance from the independent decision-making of the Fed in the fulfillment of its mandate to achieve price stability and maximum employment. But President-elect Trump has indicated on several occasions that he expects to have a greater say in setting policy rates. In fact, US Presidents already have a significant say in the Fed’s processes through the designation of the Chair of the FOMC and by making appointments to the Fed’s Board of Governors when members’ fixed terms conclude. Additionally, the Fed’s mandate and broad approach to monetary policy are reviewed roughly every five years and the President has an opportunity to contribute to this process.
We know from decades of experience that central banks tend to achieve better results in controlling inflation when their day-to-day work is kept at arm’s length from politicians. Government leaders have a persistent incentive to stoke economic growth rates higher than is consistent with their central bank’s inflation target in order to curry temporary favor with voters.
Ironically, the more politicians meddle with central bankers’ work, the harder they make it to bring down inflation and achieve the lower policy rates that governments hope will benefit businesses and consumers. The best thing President-elect Trump could do to get the lower fed funds rate he desires would be to commit to smaller federal deficits, eschew his tariff and immigration promises, and stay quiet on the Fed.
