How Will The Fed React To Trump? 2016 Holds Clues

Officials at the Federal Reserve have been noncommittal about what a Trump presidency means for the economy, but behind the scenes, they may already be discussing what the second Trump era will look like.

Transcripts of the FOMC meeting in December 2016, following Trump’s victory over Hillary Clinton in the presidential election, provide a window into how the central bank may adjust its economic forecasts to account for the second Trump era.

In a press conference last week, Federal Reserve Chair Jerome Powell said the Fed isn’t making assumptions about what Trump will do. Instead, the central bank will react to his policies only after they are officially announced, he said.

“We don’t guess. We don’t speculate. We don’t assume,” Powell said.

How The Fed Grappled With Trump’s First Victory

However, officials may already be changing their forecasts out of the public’s view.

The Fed sets its benchmark interest rate to achieve long-term goals of keeping prices stable and unemployment low, so it’s making long-range projections based on early data. The White House changing hands from Democrats to Republicans has implications for the economy, and the Fed may already be calculating what that means.

To get an idea of what that might look like, Matthew Luzetti, chief economist at Deutsche Bank, analyzed the transcripts of the Federal Open Market Committee’s first meeting after Trump’s first victory in December 2016. The Fed releases minutes of its meetings weeks after the fact but keeps a lid on transcripts for five years.

The transcripts revealed that Fed officials had extensively discussed possible implications of Trump’s first presidency before he was inaugurated. FOMC members believed Trump’s policies of tax cuts and trade wars would raise economic growth and inflation. Central bankers thought the Fed would have to keep interest rates higher to limit price increases.

“That meeting has a number of parallels to this year, with President Trump set to take the White House and promising dramatic shifts in the economic policy landscape, in particular to tax, regulatory and trade policies,” Luzetti wrote in a commentary.

Financial markets today are betting Trump’s proposed policies will lead to higher inflation and that the Fed will react by holding interest rates higher for longer than they otherwise would have.

At the 2016 meeting, a staff researcher (correctly) predicted that the new administration, with the backing of the Republican-controlled House and Senate, would push through tax cuts and estimated the changes would boost GDP growth in the coming years.