In the post-election confusion, federal officials are grappling with how to carry out their duties in the upcoming Trump era.
In the coming hours, as President-elect Donald Trump assumes office, the responsibilities of central bankers may become more complex. Some of Trump's planned actions, such as mass deportations and enforcing tariffs on key trade partners, could potentially escalate inflation, some economists caution. However, the uncertainty surrounding these decisions makes it challenging for central bankers to establish a firm monetary policy.
"The heightened uncertainty makes setting monetary policy much more difficult," stated Ellis Tallman, a former executive vice president and senior economic policy adviser at the Cleveland Fed. To navigate this uncertainty, hundreds of economists and researchers assist the Fed in scrutinizing various elements that could influence the economy, generating 'baseline forecasts.' These forecasts provide a foundation, allowing analysts to modify their projections as conditions change.
For instance, when Trump was elected in 2016, David Wilcox, then a directive of the Fed’s research and statistics division, and his team, anticipated that Trump would pursue tax cuts, a crucial campaign promise. Their initial assumption was that the tax cuts would primarily benefit individuals. However, as legislation evolved, they shifted their focus to the impact of tax cuts on businesses. "You need to be willing to change your mind when the facts on the ground change," Wilcox noted.
Assessing the scope of Trump's economic proposals is challenging, as officials grapple with creating new forecasting models. However, Fed Governor Chris Waller suggests that while the Fed can refine existing tariff simulation models, the distinctive nature of Trump's proposed tariffs and immigration policies could necessitate new models. For the time being, Atlanta Fed President Raphael Bostic prefers to defer building these models.
In contrast, St. Louis Fed President Alberto Musalem encourages forecasters to investigate the potential effects of varying tariff configurations and their influence on the economy, acknowledging the necessity of making forecasts in the face of uncertainty. For now, Chair Jay Powell seems to be adopting a wait-and-see approach, balancing the Fed's commitment to data-driven decision-making with the need to avoid inaction in the face of uncertainty.
However, the Fed's dilemma of handling uncertainty stemming from Trump's policy proposals is far from over. Trump's threatened tariffs on various goods, including Canadian and Mexican products, Chinese imports, and BRICS nations, pose challenges for Fed forecasters. Regardless of when and if these tariffs are enacted, their exact impact on the economy remains uncertain. Central banks must remain vigilant, preparing for potential policy shifts while avoiding rash actions.
"Given the proposed tariffs and immigration policies, the Federal Reserve might need to revise its existing economic models to accurately forecast the impact on businesses," suggested Fed Governor Chris Waller. "Amidst this uncertainty, it's crucial for central banks to stay vigilant, preparing for potential policy shifts while avoiding hasty decisions."
