New Delhi
Federal Reserve Chair Jerome Powell said the US Central Bank will not predict the economy's fate until it knows what policies the next trump government will impose.
The fed did not react in this way to the 2016 election of Donald Trump. At least not according to the minutes of the FED meetings during that year. Back then, the FED staff began projecting a fiscal boost to the GDP from the expected tax cuts.
In addition, Powell was one of the few policymakers who factored in changes to fiscal policy when making predictions. Powell, at his November 7th press conference, said, "There's nothing to model right now. We don't guess, we don't speculate, and we don't assume."
However, back in December 2016, Powell noted, "It seems likely that more accommodative fiscal policy will arrive during 2017." He added, "I have therefore followed the staff baseline in assuming a personal income tax cut of 1 per cent of GDP as a placeholder."
Given that Trump's policies are expected to reawaken pricing pressures and that policymakers are still fighting the highest inflation in four decades, Powell's unusually cautious stance compared to 2016 is striking.
At some point, their ability to cut rates further will be contingent upon their assessment of the interplay between tax, tariff, and immigration policies and their impact on the economy.
After falling out with presidents who reduced taxes in the past, Central bankers face a political minefield when deciding how and when to position themselves behind fiscal stimulus. They risk being seen as going against the administration's policies if they increase borrowing costs too quickly or insufficiently to counteract the consequences.
As it happened in 2021, inflation might rise sharply if rates are raised too slowly or too late.