Jerome Powell made it very clear last week that he didn’t think Donald Trump had the power to fire him , even if he wanted to.
But there was one aspect of Trump’s return to the White House that he was willing to leave as a mystery: How Trump’s proposed economic policies might affect the Fed’s expectations for a series of additional rate cuts in 2025.
“There is nothing to model right now,” Powell told reporters last Thursday after the Fed announced its second rate cut in seven weeks.
Economists say Trump’s combination of proposed across-the-board tariffs, tax cuts, and mass deportations of undocumented immigrants would put new pressure on inflation and balloon the deficit, all of which will make it more challenging for the Fed to cut rates.
A surge in Treasury yields that followed Trump’s election last week could also cause complications if it continues into next year.
Many economists are already scaling back their expectations for the number and pace of rate cuts next year on account of these proposed policies from a new Trump administration.
One is David Seif, chief economist for developed markets at Nomura. He now expects just one rate cut in 2025, with the Fed pausing rate cuts until any inflation shock from tariffs has passed. He predicts the new tariffs will lead to a "significant near-term boost" to inflation.
Capital Economics chief North America economist Paul Ashworth also now sees rates staying 50 basis points higher than previously forecast, with the Fed ending its rate-cutting campaign in the range of 3.5%-3.75%.
"The combined drag from immigration curbs and new tariffs mean that, in net terms, Trump’s return is likely to be a negative for the economy," he said.
Read more: What the Fed rate cut means for bank accounts, CDs, loans, and credit cards
Powell last week repeatedly refused to engage in a discussion about what Trump’s proposals might mean for the Fed’s current expectations of four more quarter-point rate cuts in 2025.
"We don't know what the timing and substance of any policy changes will be," Powell said Thursday. "We therefore don't know what the effects on the economy would be, specifically whether and to what extent those policies would matter for the achievement of our goal variables: maximum employment and price stability."
He said Thursday that the Fed is in no hurry to "quickly" get to neutral, a level where rates don’t slow or spur inflation, but he did admit that the Fed is "beginning to think about" slowing the pace of cuts.
"We reach a point where we slow the pace, much like [how] an airplane reaching the airport slows down," he said.
He declined to say what might happen at the Fed’s last 2024 meeting in December, saying, "We’re just going to have to see where the data led us. We have a whole six weeks of data to look at."
Investors may have to wait until that meeting for new hints as to how Powell and his colleagues are viewing the conditions they will have to confront next year. Fed officials plans to offer fresh estimates for rate cuts, inflation, and the strength of the economy through 2025 and beyond.
JPMorgan chief economist Michael Feroli said the election outcome "may have lowered the odds of a cut [in December] by a wee amount, as the appreciation in risk assets could be a factor in the discussion."
After December, he now sees the Fed easing at a quarterly pace, with the next cut coming in March and continuing until the fed funds rate reaches 3.5%.
Deja vu all over again
This is not the first time the Fed has grappled with the impact of Trump's policies. It was in the same place during its last meeting in December 2016, after Trump had been elected but before he took over as president.
Anticipated changes to fiscal policies under a new administration did come up at that December 2016 meeting, according to Matthew Luzzetti, chief US economist for Deutsche Bank Securities.
Fed staff built into its forecast an assumption of a 1% tax cut and a shift in fiscal policies that boosted the staff's assumption for the neutral interest rate by 25 basis points, according to minutes and transcripts from that meeting .
In fact, minutes from that meeting showed that "about half" of officials reflected changes to fiscal policies in their baseline outlooks but that "almost all" noted these policies shifted the distribution of risks toward stronger growth outcomes.
"Many" saw them as "potentially necessitating somewhat tighter monetary policy than currently anticipated."
Not all economists predict immediate changes from Trump’s policies. Greg Daco, chief economist for EY, isn’t anticipating any major effect from Trump’s proposed trade and tax policies until late 2025 and believes near-term consequences are minimal.
A lot of potential shocks for the economy depend on the magnitude of policy shifts, he said.
If the new administration moves forward with blanket tariffs on all trading partners and a 60% tariff on Chinese imports, then he sees a more dramatic impact, with GDP plunging by 2.5% and inflation soaring by 1.5%.
Read more: How do tariffs work, and who really pays them?
Under that scenario, the changes would represent an average income loss of $1,145 per household, with lower-income families disproportionately affected.
Daco — factoring in the changes to immigration, regulation, trade, and tax policy — sees economic growth dropping to 2% next year from 2.7% this year, before easing to 1.7% in 2026. He sees inflation easing to 2.3% in 2025 and 2026.
But he, like others, anticipates fewer rate cuts at a slower pace, with the Fed cutting at every other meeting in 2025. He expects a total of 100 basis points of reductions, versus expectations for 150 basis points previously.
“What we're doing is not necessarily integrating every single campaign promise," he said in an interview, "but rather building a new baseline that seems likely and integrates partial tariffs that are targeted and more transactional against certain economies, against certain sectors."
