Nation

US Fed's caution on rate cuts could cause friction with Trump

Donald Trump's imminent return to the White House and uncertainty about his policy proposals has begun weighing on the U.S. Federal Reserve, raising concerns of a reckoning between the central bank and the president-elect.

Fed chair Jerome Powell acknowledged on Wednesday that Trump's economic platform, which includes the threat of major tariff hikes, the extension of tax cuts, and mass deportations, had been a consideration when members of the rate-setting committee met to consider the number of interest rate cuts they expect next year.

"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 U.S. 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, the decision by many policymakers to pencil so few cuts may have signaled a willingness to keep rates higher if the new administration puts forward policies that are inflationary, Steven 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. But it must still consider how the economy could be affected by government policies.

"We're going to have to learn what policy actions Congress, or the administration, will choose to do, and then obviously study those, analyze those, and fold those in," New York Fed President John Williams told CNBC on Friday.

"I have incorporated some thinking about where fiscal policy may be, immigration and other policies, because those are important drivers to thinking about the economic outlook," added Williams, who has a vote on the Fed's rate-setting committee.

Trump has had a long and often fraught relationship with Powell, whom he originally nominated to lead the independent US central bank in 2018, frequently criticizing him during his first term for not cutting interest rates quickly enough.

The Republican president-elect has also said he has "better instincts" on the economy than many Fed governors, and argued that the president should have "at least" a say in setting interest rates — something he cannot currently do.

— From wire reports