The Federal Reserve building is seen in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts/File Photo
Federal Reserve Policy Outlook: Balancing Growth and Inflation in the Wake of Trump’s Election
Since Donald Trump’s re-election to a second term last month, Federal Reserve policymakers, including Chair Jerome Powell, have maintained that it is too early to factor in the new president-elect’s policies into economic forecasts. However, precedent suggests otherwise. Eight years ago, as a Fed governor, Powell joined colleagues in adjusting economic projections to reflect expectations of Trump’s tax cuts and deregulation policies.
With Trump again promising measures such as tax cuts, deregulation, and tariffs, an upward revision to U.S. economic growth estimates for 2024 may emerge this week as the Fed convenes for its Dec. 17-18 meeting. Alongside what is widely anticipated to be the third interest rate cut of the year, Fed policymakers will release updated forecasts for growth, inflation, unemployment, and interest rates.
Economic Momentum and Growth Projections
In September, the Fed forecasted U.S. GDP growth at 2% for 2024. However, subsequent data, including the Philadelphia Fed’s survey of professional forecasters, has shown optimism, with growth estimates rising to 2.2%.
Despite this positive outlook, the Fed is likely to avoid explicitly linking stronger forecasts to Trump’s policies. Instead, they are expected to cite recent economic data demonstrating sustained momentum, lower unemployment, and persistent inflation as justification for adjusting their outlook.
Morgan Stanley economists noted, “We are taking Chair Powell and the committee at their word when they say they will make monetary policy based on actual changes to fiscal, trade, and immigration policies and not in advance.” Even so, they anticipate Fed projections will reflect stronger growth in 2024, slower disinflation, and a reduced pace of interest rate cuts.
A Shallow Rate-Cut Path
Recent signals from Fed officials indicate a more cautious approach to rate cuts, particularly in light of the labor market’s resilience and inflation’s slower decline. The Fed’s updated economic projections, set to be released Wednesday, are expected to show a shallower rate-cut path for 2024 compared to the four quarter-point cuts projected in September. Analysts generally anticipate a median forecast of three rate cuts, with a few expecting a more hawkish outlook of just two cuts.
Inflation and Labor Market Trends
Inflation, measured by the Fed’s preferred metric—the Personal Consumption Expenditures (PCE) price index—stood at 2.3% in October, aligning with the Fed’s earlier projections. However, core PCE inflation, which excludes volatile food and energy prices, has been more persistent. Analysts expect core inflation to close 2023 at approximately 2.8%, above the Fed’s September projection of 2.6% for the fourth quarter of 2024 and 2.2% by the end of 2025.
Labor market strength adds further complexity to the Fed’s decision-making. The unemployment rate, at 4.1% in October and 4.2% in November, remains below the 4.4% forecasted by Fed policymakers in September. Barring a significant deterioration in December, the Fed is likely to revise its unemployment rate projections slightly lower.
These factors—stubborn inflation and a firm labor market—are likely to influence policymakers to adopt a more restrained rate-cut approach for the coming year.
Long-Term Interest Rate Adjustments
Policymakers may also signal adjustments to the “longer-run” federal funds rate, previously estimated at 2.9%. Dallas Fed President Lorie Logan has emphasized the need for a slower pace of policy easing as the Fed’s benchmark rate approaches its longer-run equilibrium. Some analysts anticipate this stopping point could rise to 3% or higher, further reinforcing a gradual approach to rate cuts.
COMMENTS