US Fed's caution on rate cuts sparks uncertainty

December 20, 2024 (MLN): Fed Chair Jerome Powell acknowledged that Trump's economic platform, which includes the threat of major tariff hikes, the extension of tax cuts, and mass deportation, was taken into account by the Federal Reserve, as APP reported.

These policies were considered by the rate-setting committee when discussing the number of interest rate cuts anticipated for the next year.

Donald Trump's imminent return to the White House and uncertainty about his policy proposals have begun weighing on the U.S. Federal Reserve.

This has raised concerns about a potential reckoning between the central bank and the president-elect.

"Some did identify policy uncertainty as one of the reasons for their writing down more uncertainty around inflation," Powell said after the Fed announced it was cutting rates by a quarter point and signaled just two cuts in 2025.

We don't know what'll be tariffed from what countries, for how long, and what size," he said.

"We don't know whether there will be retaliatory tariffs, we don't know what the transmission of any of that will be into consumer prices."

Previously, Powell had refused to comment on how the Fed was thinking about the potential impact of the next administration's economic policies.

Trump has continued to insist that, "properly used," tariffs would be positive for the US economy.

 "Our country right now loses to everybody," he told reporters at his Florida residence earlier this week. "Tariffs will make our country rich."

Given the uncertainty over Trump's plans, many policymakers may have signaled their willingness to keep rates higher by penciling in so few cuts.

This could be a response to potential inflationary policies from the new administration, Steve Englander, head of G10 FX Research at Standard Chartered Bank, told AFP.

"There are reasons not to be that pessimistic, and yet they chose to be that pessimistic," he said.

"So it's hard to sort of avoid the signal that maybe they wanted to send a message."

 The US central bank has a dual mandate from Congress to act independently to tackle inflation and unemployment.

However, it must still consider how the economy could be affected by government policies.

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