Copyright 2024
MNI (WASHINGTON) - President-Elect Donald Trump's promises to tighten immigration and impose across-the-board tariffs will have no impact on the Federal Reserve's plan to reduce interest rates in the near term, Fed Chair Jerome Powell said Thursday after the FOMC cut rates for a second straight meeting.
Treasury yields continued to climb this week as investors worried about the expansion of fiscal deficits and a resurgence of inflation under a second Trump administration, and Wall Street analysts revised higher their forecasts for the Fed's benchmark overnight rate for next year. The 10-year Treasury yield has jumped roughly 60 bps since the Fed started cutting rates in September.
The tightening of financial conditions bears watching, but there's no need now to react to that or Trump's campaign promises, Powell said.
"We're on a path toward a more neutral stance. That has not changed at all since September," Powell told reporters. "In the near term, the election will have no effect on our policy decisions."
On financial conditions, Powell said, "it's material changes that last that matter," adding, "right now it's not a major factor."
Thursday's widely anticipated quarter-point cut takes the federal funds rate to a 4.5%-4.75% target range, down 75 bps from its Covid-era peak. The median FOMC member in September had penciled in a cumulative 100 bp of cuts this year and next as inflation cools to 2%. Futures traders see roughly one fewer cut by end-2025, and that was little changed Thursday. (See: MNI INTERVIEW: Fed To Pause, Take Stock Early 2025 -Lockhart)
Data since September have taken away some downside risks to economic activity, while the latest inflation report "wasn't terrible" but came in a little higher than expected, Powell said. Headline PCE inflation was 2.1% in September while core inflation has been stuck at 2.7% since July.
The labor market is also continuing to cool at a "modest rate," Powell said, noting the October jobs report would have shown more hiring activity were it not for the effects of two hurricanes and labor strikes.
"Overall, a broad set of indicators suggests that conditions in the labor market are now less tight than just before the pandemic in 2019," he said. "We've gotten this far without seeing a real weakening in the labor market, and we believe we can complete the inflation task while also keeping the labor market strong."
The Fed continues to take in data and anecdotal reports from businesses in trying to find the ultimate destination for rates, Powell said.
"We don't know the right pace, and we don't know exactly where the destination is. So the point is to find that," he said. "Nothing in the economic data suggests that the committee needs to be in a hurry to get there."
As Trump gets closer to enacting new policies, staff economists at the Fed would begin briefing the FOMC on simulations of their potential effects via economic models, Powell said. When the policies become law, the models are tweaked and outcomes incorporated into complex economic models of the U.S. economy.
"Clearly the legislative process takes a lot of time. And of course the real question is not the effect of that law – it's all of the policy changes that are happening. What's the net effect and the overall effect on the economy at a given time," he said.
"We don't know what the timing and substance of any policy changes will be. We therefore don't know what the effects on the economy would be," he said. "We don't guess, we don't speculate, we don't assume."
