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The Fed is trapped in neutral, since it observes how Trump’s policies develop


The president of the United States Federal Reserve, Jerome Powell, testifies to an audience of the Banking, Housing and Urban Affairs of the Senate on “The Semiannual Monetary Policy Report to Congress”, in Capitol Hill in Washington, USA ., February 11, 2025.

Craig Hudson | Reuters

The popular narrative among the Federal Reserve policies these days is that the policy is “well positioned” to adapt to any upward risk or the loss. However, it could be more precise to say that politics is trapped in position.

With a large number of unknowns that swirle through the economy and halls of Washington, the only team in which it can really be these days is neutral, since it begins what could be a long wait for the certainty of what really It is ahead.

“In recent weeks, we have heard not only the enthusiasm, particularly of the banks, about possible changes in fiscal and regulatory policies, but also a general apprehension by the future trade and immigration policy,” said the president of the FED of the Fed of Atlanta, Raphael Bostic. A blog post. “These crossed currents are injected even more complexity in policy formulation.”

Bostic’s comments occurred for an active week for what is known on Wall Street as “Fedspeak”, or the talk that occurs between chair policy meetings Jerome PowellGovernors of the Central Bank and Regional Presidents.

The officials who have spoken frequently described the policy as “well positioned”: the language is now a basic element of the statements after the meeting. But more and more, they are expressing caution about the volatility that President Donald Trump comes Aggressive trade and economic agendaas well as other factors that could influence politics.

The impact tariffs could have in growth are being little at prices, says Tom Porcelli of PGIM

“Uncertainty” is an increasingly common issue. In fact, Bostic titled his blog post on Thursday “uncertainty demands caution, humility in policy formulation.” A day earlier, the Federal Open Market Committee for Rate Establishment Released minutes of the meeting from January 28 to 29, with a dozen references to the uncertain climate in The document.

The minutes specifically cited “high uncertainty with respect to the scope, moment and the possible economic effects of the possible changes in commercial, immigration, fiscal and regulatory policies.”

The factors of uncertainty in the decision making of the FED in two ways: the impact it has on the Employment imagewhich has been relatively stable and inflation, which has been relieved but could rise again As consumers and business leaders are scared of impact tariffs could have prices.

Losing the goal

The Fed points to 2%inflation, an objective that has been difficult to achieve in four years.

“At this time, I see that the inflation risks are maintained above the target as rise,” said St. Louis Fed, Alberto Musalem, to journalists on Thursday. “My reference scenario is one in which inflation continues to converge towards 2%, provided that monetary policy remains modestly restrictive, and that will take time. I think there is the potential that inflation remains high and the activity is Slow … That is an alternative scenario, not a reference scenario, but I am attentive to it. “

The operation in Musalem’s comment is that the policy remains in “modestly restrictive”, which is where it considers the current level of the Fed fund rate between 4.25%-4.5%. Bostic was a little less explicit when he felt the need to keep the fees on hold, but emphasized that “this is not time for complacency” and pointed out that “additional threats to prices stability may arise.”

The president of the Chicago Federal Reserve, Austen Goolsbee, who is believed to be among the less aggressive FOMC members when it comes to inflation, was more measured in their rates evaluation and did not offer comments on separate appearances, including one in CNBC, where you think the rates should go.

“If you are only thinking about tariffs, it depends on how many countries they will apply and how large they will be, and the more you look like a shock the size of a covid, the more nervous it should be,” Goolsbee said.

Many risks ahead

However, in more general terms, the January minutes indicated a Fed highly in tune with possible clashes and not interested in testing the waters with more interest rate movements. The summary of the meeting pointed promptly that the members of the committee want to “progress more in inflation before making additional adjustments to the target range for the federal funds.”

There are also more than just tariffs and inflation to worry about.

The minutes characterized the risks for financial stability as “remarkable”, specifically in the area of ​​leverage and the level of long -term debt that banks have.

The prominent economist Mark Zandi, not normally an alarmist, said in a discussion panel presented by the Peter G. Peterson Foundation that is concerned about the dangers of the American bond market of $ 46.2 billion.

“In my opinion, the greatest risk is that we see a great sale in the bond market,” said Zandi, chief economist of Moody’s Analytics. “The bond market feels incredibly fragile for me. The plumbing is broken. The main distributors do not keep up to date with the amount of pending debt.”

“There are so many things that come together that I think there is a very significant threat that at some point in the next 12 months, we see a great sale in the bond market,” he added.

In this climate.

It is an illusion thinking about considering tariffs and other intangibles that hang on the head of the Fed, said Zandi.

“I just don’t see that the Fed reduces interest rates here until it has a better feeling about inflation that returns to the goal,” he said. “The economy entered 2025 in a pretty good place. It feels as if it were working well. It should be able to resist many storms. But it seems that there are many storms.”

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