The Fed Remains Cautious as It Monitors the Impact of Trump’s Policies

Currently, a prevailing sentiment among Federal Reserve policymakers is that the monetary policy is adequately structured to respond to any potential risks, whether positive or negative. However, it may be more truthful to assert that the policy is somewhat stagnant.

With numerous uncertainties permeating the economy and influencing discussions in Washington, the central bank may be relegated to a neutral stance as it embarks on what could be a lengthy wait for clarity regarding future developments.

“Recently, we have heard a mix of enthusiasm, particularly from banks regarding potential changes in tax and regulatory frameworks, alongside significant concerns about upcoming trade and immigration policies,” noted Atlanta Fed President Raphael Bostic in a blog post. “These conflicting dynamics add further complexity to the policymaking process.”

Bostic’s remarks came amid a week bustling with what Wall Street labels “Fedspeak,” referring to the communications from Chair Jerome Powell and other central bank officials occurring between policy meetings.

Policy discussions have frequently featured phrases like “well-positioned,” suggesting a readiness for action—a phrase that has become commonplace in post-meeting communications. However, there is an increasing expression of caution regarding the volatility stemming from President Donald Trump’s assertive trade and economic policies, alongside other variables that could sway monetary policy.

The theme of “uncertainty” is becoming increasingly prevalent. Bostic aptly titled his recent blog post “Uncertainty Calls for Caution and Humility in Policymaking.” Just the day before, the Federal Open Market Committee disclosed minutes from the January 28-29 meeting, which contained numerous mentions of the prevailing uncertain environment.

The minutes explicitly highlighted “elevated uncertainty regarding the scope, timing, and potential economic impacts of anticipated changes to trade, immigration, fiscal, and regulatory policies.”

Uncertainty plays a dual role in the Fed’s decision-making process: it affects the employment landscape, which has shown relative stability, and inflation, which has been decreasing but could rise again if consumers and business leaders become concerned about the pricing impacts of tariffs.

The Federal Reserve aims for an inflation rate of 2%, a target that has remained elusive for nearly four years.

“Currently, I perceive the risks of inflation exceeding the target as skewed towards the upside,” remarked St. Louis Fed President Alberto Musalem to reporters on Thursday. “My baseline scenario anticipates inflation converging towards 2%, assuming monetary policy remains modestly restrictive, which will require time. I believe there exists a possibility for inflation to remain elevated while economic activity slows. … This is an alternative scenario, not my primary projection, but I remain attentive to it.”

The key takeaway from Musalem’s statement is the expectation that policy will stay “modestly restrictive,” aligning with the current fed funds rate of 4.25% to 4.5%. Bostic was slightly less direct about his inclination to maintain rates, yet he stressed that “this is no time for complacency” and remarked that “additional risks to price stability may emerge.”

Chicago Federal Reserve President Austan Goolsbee, regarded as one of the less hawkish members when it comes to inflation, offered a more measured view regarding tariffs and refrained from giving explicit commentary on interest rate outlooks, including during one of his appearances on CNBC.

“If you’re solely focused on tariffs, it hinges on which countries they apply to, how substantial they are, and the more it resembles a Covid-like disruption, the more concerned you should be,” Goolsbee observed.

Broadly speaking, the January meeting minutes indicated that the Fed is highly alert to potential shocks and is not inclined to test the waters by implementing further interest rate changes. The committee members emphasized the need for “further progress on inflation before making additional adjustments to the federal funds rate target range.”

Moreover, there are concerns beyond merely tariffs and inflation. The minutes described the threats to financial stability as “notable,” particularly regarding leverage levels and the amount of long-duration debt held by banks.

Noted economist Mark Zandi—typically not one to sound alarms—expressed concerns during a panel discussion hosted by the Peter G. Peterson Foundation about the vulnerabilities facing the $46.2 trillion U.S. bond market.

“In my estimation, the primary risk is a significant sell-off in the bond market,” asserted Zandi, chief economist at Moody’s Analytics. “The bond market appears remarkably fragile. The underlying mechanisms seem compromised. The primary dealers aren’t managing the outstanding debt volume effectively.”

“There are numerous factors converging, leading me to believe there’s a substantial risk that within the next year, we might witness a major bond market sell-off,” he added.

Given this prevailing environment, he indicated there is little chance for the Fed to lower rates—despite market expectations of potential half-percentage-point cuts by year-end.

This notion seems overly optimistic considering the looming uncertainties surrounding tariffs and various other variables affecting the Fed’s position, Zandi explained.

“I simply do not foresee the Fed reducing interest rates until there is a clearer indication regarding inflation returning to the target,” he stated. “The economy appeared to start 2025 on solid footing. It appears to function effectively and should be able to withstand numerous challenges. However, a multitude of storms seems imminent.”