TRUMP UNCERTAINTY
The new policy rate is now a percentage point lower than the peak reached in September when officials concluded inflation was dependably on the way back to the 2 per cent target and that there were risks to the job market of keeping monetary policy too tight for too long.
Key measures of inflation since then, however, have largely moved sideways, while continued low unemployment and stronger-than-expected economic growth have sparked debate among policymakers about whether monetary policy is as tight as thought – a discussion reflected in the steady increase in the long-run estimate of the neutral rate over the past year from 2.5 to 3.0 per cent.
The Fed, which hiked rates aggressively in 2022 and 2023 to combat a surge in inflation, began its easing cycle in September with a half-percentage-point cut in borrowing costs. It lowered rates by a quarter of a percentage point last month.
The latest quarterly projections are the first since President-elect Donald Trump’s victory in the Nov 5 election, which introduced a new level of uncertainty into the economic outlook given his campaign promises for tax cuts, tariff hikes, and a crackdown on unauthorized immigration – aspects of which some analysts see as inflationary.
Trump doesn’t take office until Jan 20, and Fed officials have said they can’t base monetary policy on campaign proposals that may or may not be enacted.
Still, Fed staff have likely been gaming out different scenarios, and policymakers’ projections show growth remaining above potential at 2.1 per cent next year, inflation staying above target for two more years, and the jobless rate never rising above 4.3 per cent.
