Gregory Daco on Trump's Fed Pressure: 'Hurt the Economy'

The Perils of a Politicized Federal Reserve

• ⚠️ A politically captive Fed, influenced by politicians like President Trump, would paradoxically hurt the US economy rather than help it.
• 💡 Loss of Fed credibility would lead to upward pressure on long-term yields and increased risk premiums due to expected higher inflation and concerns about fiscal dominance.

Impact of Significant Monetary Policy Easing

• 📉 A drastic reduction in the Fed funds rate, from above 4% to around 1%, would stimulate higher inflation expectations.
• ⚡ This could lead to inflation de-anchoring to the upside, significantly impacting consumers and businesses and weighing on economic activity.
• 🎯 The White House's goal of lowering long-term borrowing rates could be counterproductive if investor belief in Fed independence wanes, driving up long-term yields.

FOMC Dynamics and Future Policy

• 🧠 The FOMC is a voting body, and even a new Fed chair would need to convince a majority of policymakers, most of whom remain politically unbiased and focused on the dual mandate.
• 📈 The committee is expected to add more 'hawks' in the rotation next year, making it harder to ease policy unless there's a significant economic slowdown or less inflation than expected from tariffs.
• 📊 The forecast anticipates a couple of rate cuts before the end of 2025 and 100 basis points of cuts in 2026, driven by weakening labor market momentum and cooling GDP growth.

Powell's Stance and Near-Term Outlook

• ✅ Jerome Powell is expected to act in the best interest of the US economy, focusing on the dual mandate of maximum employment and price stability, considering the views of other Fed policymakers.
• 🗓️ September is considered the more likely outcome for an initial easing of monetary policy, supported by arguments for moving policy from slightly restrictive closer to neutral, given anchored inflation expectations and disinflationary currents.