Trump's Policies May Limit Fed Rate Cuts in 2025

The Federal Reserve's "hawkish" quarter-point rate cut, the third of 2024, signals a shift towards a more cautious approach to monetary policy, and President-elect Donald Trump's proposed policies could further limit the central bank's ability to lower rates in 2025, according to Brett House, Professor of Professional Practice at Columbia Business School, in an interview with CBS Insights.

While the Fed has implemented 100 basis points of rate cuts since September, the FOMC's updated projections suggest fewer cuts are anticipated for 2025, along with higher inflation, lower unemployment, and slightly stronger growth. The most recent cut also faced internal opposition, indicating a higher bar for future reductions.

House believes that Trump's proposed tariff and immigration policies will exacerbate inflationary pressures, potentially hindering further rate cuts.

"Significant tariffs on imports from Canada, China, and Mexico…will push up prices for American businesses and consumers," he explained. Restrictions on immigration could also increase labor costs, contributing to higher prices. Combined with tax cuts, these policies could lead to larger federal deficits, further stimulating demand and driving up inflation.

The impact of these policies on businesses and consumers could be significant. While cuts in the fed funds rate can lower borrowing costs for variable-rate loans, interest rates on fixed-rate mortgages and car loans, often benchmarked to US Treasury yields, have risen since the Fed's initial rate cut in September.

House also notes that Trump's policy pronouncements during his first term often differed from his actual achievements, highlighting the potential for greater uncertainty in predicting the outcome of his second term. He pointed out that the first Trump administration, while promising sweeping changes to trade policy, ultimately made only minor adjustments to NAFTA. Similarly, despite repeated pledges to support infrastructure development, the administration's primary fiscal achievement was the Tax Cuts and Jobs Act.

Regarding the interaction between Trump and Fed Chair Powell, House acknowledged the President-elect's stated desire for greater influence over monetary policy. However, he emphasized the importance of central bank independence in controlling inflation and achieving economic stability.

"Ironically, the more politicians meddle with central bankers’ work, the harder they make it to bring down inflation and achieve the lower policy rates that governments hope will benefit businesses and consumers," House stated.