欧博官网The Federal Reserve, the new administration, a
The policies pursued by the Trump administration have complicated the Federal Reserve’s monetary policy decision making. First, the substantial uncertainty regarding a range of administration policies, particularly regarding trade, and their potential effects on the economy has made it more difficult to judge the appropriate path for policy. Second, the administration has subjected the Fed to greater political pressure than has been seen in many years, pressing the central bank to ease monetary policy significantly. Thus far, the Fed has followed a cautious path for policy, waiting for more information on policy and the outlook before making further adjustments. And the protections for Fed independence in the Federal Reserve Act provide a buffer against political pressures. Thus, the Fed should be able to continue to set monetary policy to best foster its mandates from Congress for maximum employment and stable prices, despite the elevated uncertainty and political pressures.
BackgroundAs the economy rebounded from the effects of the covid pandemic, the strong growth collided with disruptions in supply chains, leading to a sharp spike in inflation (English et al. 2024). The higher inflation proved more persistent than originally expected, and the Fed raised rates sharply in response (Waller and Ihrig 2023). The tighter monetary policy helped to reduce pressures on resources, and, with the ebbing of supply disruptions, inflation fell back, though it remained elevated. Last summer, the economy appeared to be slowing further, and with inflation apparently on track to return to near-target levels, the Fed eased policy last fall, aiming to get inflation back to 2% without causing a recession – that is, to achieve a ‘soft landing’.
The effects of tariffsConsistent with this outlook, Federal Open Market Committee (FOMC) projections last December showed the economy remaining on track, with the unemployment rate staying near its longer-run normal level and inflation gradually falling back to 2% (Figure 1). This benign outcome depended importantly on the anchoring of longer-term inflation expectations near the Fed’s 2 percent target. That anchoring was expected to help pull actual inflation down to target over time without requiring significant slack in labour and goods markets. Indeed, despite the high inflation seen in 2021-23, medium- and longer-term inflation expectations generally remained fairly near target (Figure 2), and the substantial decline in inflation over 2023 and 2024 increased confidence that inflation would continue to move lower so long as there were no additional shocks to the economy.
Figure 1 December 2024 median SEP projections (percent)
Figure 2 Inflation expectations (percent)
However, the sharp increases in tariffs imposed by the new administration raised concerns about the outlook for both inflation and employment. While the level of tariffs has been subject to considerable revision, the overall estimated average tariff level has risen from 2.4% to more than 18%, the highest level since before WWII (Yale Budget Lab 2025). Because the increase in tariffs this year is far outside the range of recent experience, it is very difficult to be confident about estimates of its economic effects. One estimate of such effects was provided by the Fed staff in 2018 (Federal Open Market Committee 2018). Those estimates assumed that the US imposed an additional across-the-board 15% tariff on all non-oil imports, and that US trading partners imposed an equal counter-tariff on all non-oil US exports. The Fed staff estimated that these tariffs and counter-tariffs would boost inflation by about a percentage point, with the effect tailing off over a year or so, while the unemployment rate would rise by about half a percentage point and fall back more gradually. The staff judged at that time that inflation expectations were sufficiently well anchored near target that the effects of the inflation on longer-term expectations would be small, allowing the Fed to ‘look through’ the tariff-induced inflation and not respond with tighter monetary policy. If policymakers did have to tighten policy, however, staff estimates suggested that the unemployment rate might rise by nearly a full percentage point.
Broadly consistent with these estimates, the June 2025 projections of FOMC participants showed a significantly higher near-term path for both inflation and unemployment than last December (Figure 3). With regard to PCE inflation, the 2025 median projection increased from 2.5% to 3.1%, with the 2026 projection rising from 2.2% to 2.4%. The projection for the unemployment rate rose from 4.3% to 4.5% both this year and next. Thus, as in staff analysis, the effects of the increase in tariffs on inflation are seen as waning fairly rapidly, while those on employment are more persistent. That optimism with regard to inflation likely reflects the view that inflation expectations will remain fairly well anchored near 2%. Most FOMC participants also saw the uncertainty around their June unemployment and inflation forecasts as higher than usual and the risks to their forecasts as tilted toward higher inflation and higher unemployment. In short, the FOMC still anticipates a soft landing, but now with a longer runway and elevated uncertainty and risks.
Figure 3 June 2025 median SEP projections (percent)
One reason for the elevated uncertainty is the range of estimates of the level and impact of tariffs. Recent work by staff at the IMF points to these uncertainties (IMF 2025). The IMF estimates assume a very different pattern of tariffs than the Fed staff, with the average tariff rate in the US rising by 25 percentage points while the average counter-tariff increases by just 5 percentage points. IMF models suggest that these tariffs would boost headline CPI inflation by about half a percentage point, with the effect waning after about a year. The estimated effect on output was a decline of nearly 1% for two years, consistent with an increase in the unemployment rate of about a half percentage point. Thus, even with the smaller assumed counter-tariffs, these estimates suggest a larger relative impact on output than in the Fed estimates, and so they would likely suggest a different path for monetary policy.
Other risks and uncertaintiesIn addition to trade policy, fiscal policy is a significant source of uncertainty for the outlook and monetary policy. Congress has extended the 2017 tax cuts, increasing budget deficits over coming years (Congressional Budget Office 2025). Such an outcome could boost economic activity to unsustainable levels, risking higher inflation unless the FOMC responds with tighter monetary policy. And continued large deficits could undermine investor confidence in the willingness and ability of the US fiscal authorities to address the current unsustainable fiscal trajectory in a timely manner. As a consequence, investors could pull back from investments in Treasury securities, boosting yields and potentially causing financial stability risks. Such an outcome would present the Fed with difficult trade-offs between, on the one hand, providing support for Treasury market functioning by cutting interest rates or purchasing Treasury securities and, on the other hand, implementing monetary policy aimed at low and stable inflation.
Other sources of uncertainty could also make monetary policymaking more complicated for the Fed. Immigration policy has tightened substantially, consistent with pledges made during the election campaign, but the sizes of the resulting effects on the labour market and broader economy are unclear. The administration has also pledged to cut regulation, which could help boost growth over time, but may also pose risks, including risks to financial stability. Geopolitical tensions have increased greatly this year, particularly in the Middle East, with the potential for disruptions to energy supplies and shipping that could have significant economic consequences. Indeed, the very high level of policy uncertainty could, by itself, damp spending by households and businesses, causing the economy to slow.
Implications for monetary policyDespite these challenges, employment has continued to expand this year, and inflation has edged down, on balance, despite the initial effects of tariffs. With policy still judged to be at least somewhat tight, the Fed has remained on the sidelines, awaiting additional information on the economy and the outlook before making further policy adjustments. A modestly tight stance of policy has been judged appropriate given the expected inflationary effects of tariffs and the risks to the anchoring of inflation expectations that another period of elevated inflation could pose. While policymakers would presumably like to be pre-emptive, it is difficult to be pre-emptive given the current high levels of uncertainty. Thus, unless the situation changes, policymakers appear inclined to wait to see the administration policies that emerge, and to gain more information on their economic impact, before adjusting policy. The Fed has emphasised that if inflation ends up higher than expected, it can leave rates higher for longer to counter the inflation, while if the economy slows more than expected, it can cut faster and sooner than currently expected to support employment (Federal Open Market Committee 2025a: 3). Of course, if the economy weakens and inflation rises, the Fed would face a dilemma. In that event, appropriate policy would likely depend in part on what happens to inflation expectations, with better anchored expectations allowing the Fed to ease sooner and more rapidly to address the risks to the employment side of its mandate.
Federal Reserve independenceThe Federal Reserve has been subject to political pressure at times in the past, but in recent decades, such pressure has been limited, at least in public. However, the new administration has taken a more confrontational approach, with the President and members of his administration publicly pressing the Fed to cut interest rates and suggesting a possible desire to remove Jerome Powell as Chair (e.g. Schwartz et al. 2025, Smith and Romm 2025). Moreover, it is easy to see how economic developments could lead to additional pressure on the Fed to ease policy. For example, with the midterm elections coming up next year, weakness in employment and economic activity could lead to additional demands from the administration and Congress to ease policy, even if inflation is high and inflation expectations move up. In addition, the move to higher interest rates in recent years, after a long period near the lower bound, has contributed to a substantial run-up in interest payments on Treasury debt as a share of GDP (Figure 4). Given the political difficulty of cutting federal spending to address the deficit, there have already been calls for the Fed to reduce interest rates to ease fiscal pressures (as noted in Smith and Romm 2025).
Figure 4 Federal interest outlays as a share of GDP (percent)
An important aspect of the current discussions over Fed independence is that President Trump will have the opportunity to name at least two new members of the Board of Governors in the remainder of his term, including a new Chair next May. Given his substantial criticism of Fed policy, it is likely that he will select a Fed Chair who he expects will take monetary policy direction from the White House. Such an outcome could undermine the Fed’s independence and so result in higher inflation and worse economic performance on average over time (e.g. Alesina and Summers 1993).
However, the new Chair will need to get the votes for politicised monetary policy on the FOMC and doing so might not be easy. The Federal Reserve Act includes significant protections for monetary policy independence, including overlapping 14-year terms for members of the Board of Governors and the inclusion of five Reserve Bank presidents (on a rotating basis) on the FOMC. The Reserve Bank presidents are not nominated by the President, but are chosen by the Boards of Directors of their Banks and approved by the Board of Governors; they serve for five-year terms, which are typically renewed at least once. Thus, it is probable that the composition of the FOMC in two years’ time will not be all that different than it is today.
Of course, Congress could change the Federal Reserve Act to allow the President to make larger changes to the FOMC and so allow for more political control over monetary policy decisions. However, it is not clear that Congress would support such changes. When the current structure of the FOMC was put in place in the 1935, Congress amended the initial proposal to insulate monetary policy from political considerations and from the President (Richardson and Wilcox 2024). Moreover, a significant weakening of Fed independence could lead to a sharp market reaction – inflation expectations would presumably rise, as would longer-term interest rates, while stock prices and the foreign exchange value of the dollar would likely fall. Indeed, we saw a hint of this sort of market reaction in the spring, when there was concern that the President might try to fire Chair Powell (Schwartz et al. 2025). The risk of such a reaction makes a Congressional move in this direction less likely and perhaps could limit the administration’s actions as well.
Concluding remarksThe new administration has made the Fed’s monetary policymaking more complicated both because of the elevated uncertainty regarding administration policies and because of the extraordinary political pressure put on the Fed. Thus far, the Fed has responded to the heightened uncertainty by acknowledging the risks and waiting for additional information before making changes in policy. And it has set aside the political pressure and continued to focus its policy decisions and communication on fostering the goals provided for it by Congress: maximum employment and stable prices. The protections provided by Congress in the Federal Reserve Act should continue to help limit the politicisation of the Fed and so contribute to better outcomes for the economy over time.
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FootnotesOf course, changes in other factors could also be at play, but the change to the outlook for tariffs seems likely to be the most important development affecting the FOMC participants’ outlook this year. Indeed, at his June press conference, Chair Powell suggested that the effects of the tariffs could be seen in the revisions to the SEP projections; see Federal Open Market Committee (2025b: 7).
See the discussion on this point in Federal Open Market Committee (2025b: 3).
The Bank of England faced such choices when fiscal proposals from the Truss government caused turmoil in the gilt market. See Wilkins (2024) for a discussion of how the Bank of England managed the resulting trade-offs.
See Congressional Budget Office (2024) for a discussion of the effects of immigration on the labour force and employment in recent years.
See the discussion in Baker et al (2016). Caldera et al. (2016) find that increases in policy uncertainty have a particularly large effect on the economy if they are accompanied by a tightening of financial conditions. Since financial conditions have remained accommodative (stock prices are high and risk spreads are fairly narrow), the effects of uncertainty on the economy may not be that large in the current circumstances.
Indeed, Katz and Miran (2024) urged reforms under which the President would have the authority to fire all members of the FOMC without cause, a change that would give the President a great deal of influence over monetary policy. (Miran is Chair of the Council of Economic Advisers and has recently been nominated to a seat on the Board of Governors, while Katz is the Chief of Staff at the Treasury Department.) In addition, the Supreme Court could find that the current structure of the Board and FOMC is unconstitutional and require that the President have the authority to dismiss Governors and Reserve Bank presidents. However, the recent decision in Trump v. Wilcox suggests that the Court is unlikely to take such a step. For additional background, see Tarullo (2024).