Powell cautiously observes "Trump 2.0" and the market worries that the Federal Reserve will make mistakes again.

Federal Reserve Chairman Jerome Powell said he hopes to observe the policies that President Trump will implement before predicting their impact on the economy. Powell said at a press conference on November 7, "There is nothing we can simulate right now. We don't speculate, we don't guess, we don't assume." Powell cautiously observes, different from 2016 The Fed's response is different from when Trump won the U.S. election in 2016. Meeting records at that time showed that Fed staff had started predicting a boost in economic growth from fiscal stimulus a month before Trump took office, but some effects would be offset by higher interest rates. These predictions were based on assumptions that promised tax cuts would be passed. Several policymakers, including Powell, also factored in changes in fiscal policy into their forecasts. "2017 may see looser fiscal policy," Powell, who was a Fed governor at the time, wrote in his forecast comments submitted at the December 2016 Federal Open Market Committee (FOMC) meeting. "Therefore, I followed the staff's baseline assumption, setting individual income tax cuts at 1% of GDP as a placeholder." He also said he had changed his rate forecast to three rate hikes in 2017, rather than two 25-basis point hikes. Given that Trump's policies are expected to rekindle price pressures, and Fed officials are still grappling with ending the toughest inflation period in forty years, Powell's caution in comparison with 2016 is astonishing. How much further the Fed can lower rates still depends, to some extent, on how officials view the impacts of tax, tariffs, and immigration policies on the economy. Former Fed Governor and economics professor at the University of Chicago Booth School of Business Randall Kroszner said the "job of keeping inflation under control is not yet done," and deregulation and business-friendly tax policies could boost the economy. In the short term, as the U.S. economy is lifted, the Fed's path for rate adjustments becomes flatter. Fed risks making the same mistake again For Fed officials, there is political risk in how and when to act around fiscal stimulus. If they raise rates too early or too much to counteract the impact, they could be criticized for going against government policy. If they raise rates too little or too late, inflation could spike, as it did in 2021. Eight years ago, it was challenging to accurately predict the effects of Trump's proposed policies. The Fed eventually began cutting rates in July 2019, just nineteen months after Trump's tax cuts were passed, to address slowing manufacturing and inflation rates falling below the 2% target. Former Fed Governor Lawrence Meyer believes Fed officials "should do alternative simulations" to understand how the economy performs after tax cuts. "They shouldn't set monetary policy based on things they don't know." However, others worry that if the Fed's response is slow, they may make a mistake. Trump has again promised to cut taxes, and with control of both houses of Congress, he may extend tax cut policies. Senior researcher at the Brookings Institution Sarah Binde said, "The GOP united control pattern we're seeing now is not a moderated one. I understand why Fed officials might want to steer clear to understand better what's going to happen in the future. But there is indeed a risk of getting stuck in a dilemma." Several Wall Street banks are already eager. Since Trump won a second term, economists at JPMorgan Chase, Barclays, and Toronto-Dominion Bank have lowered their predictions for rate cuts next year. Investors have also reduced expectations for rate cuts in 2025. Senior researcher at the American Enterprise Institute Kyle Pomerleau said, at the end of 2016, it was "a very reasonable assumption" that Congress would pass a bill for individual income tax cuts and stimulate demand. He said this time around, taking the same measures may not be as reasonable. "Consensus within the Republican Party on what to do is diminishing. The deficit is higher."