Donald Trump’s policies are likely to keep inflation high, putting the brakes on future rate cuts, according to Federal Reserve (Fed) economists. Meanwhile, Republicans in Congress are trying to find a way to increase debt to fund those policies.
Fed Minutes
The inflation test came with the exemptionminutes of the Federal Reserve’s December meeting last week. Fed economists included President-elect Donald Trump’s campaign promises in their forecast.
Instead of identifying with Trump, economists adopted a Harry Potter-like approach (Lord Voldemort is referred to as “who shall not be named”) by referring to an unnamed proxy. Unfortunately, programs to hold the place, such as reduced taxes and deregulation and general taxes as well the largest deportation in American historythey are exactly like Trump’s.
The Economic Boomerang
Trump criticized high prices and high inflation on the campaign trail. However, Fed minutes show staff are concerned that Trump’s policies could actually increase inflation, slow economic growth, and increase unemployment.
“Risks around the inflation forecast were seen as tilted to the upside,” the minutes recorded, “as core inflation did not decline as expected in 2024 and the effects of trade policy changes could be greater than staff thought.”
In addition, the minutes from the December meeting “noted that recent higher-than-expected readings on inflation, as well as the effects of possible changes in trade and immigration policy, suggested that the process (of lowering rates) could take longer than previously expected.” .
Low GDP and High Unemployment
In addition, Fed officials see a decline in Gross Domestic Product (GDP) and jobs as a result of Trump’s policies.
GDP is a measure of the amount of goods and services produced by a country. Generally, the higher the GDP of a nation – the better its economy.
The Fed’s minutes say: “After incorporating the latest data and local authorities’ initial assumptions about possible policy changes, real GDP growth was expected to be slightly lower than the previous initial forecast, and the unemployment rate was expected to rise slightly.”
wait and see
Fed officials are reluctant to voice public concerns about the president-elect’s plans. However, the minutes show that “many participants” at the December Fed meeting urged a “cautious approach” to considering future rate cuts.
Some Fed watchers were expecting a quarter-point rate cut over the course of 2025. However, Fed minutes show that the national bank is taking a wait-and-see approach. Waiting to see if Trump follows through on his promises/threats and, if he does, what impact they might have on inflation, jobs, and consumer prices.
The Fed has cut rates a total of 1 percent since September.
Increasing Debt Credit
Raising the debt limit was not included in the Fed staff’s forecast. However, it is an important part of funding Trump’s agenda. It is also the key to keeping the government running.
At one point, Congress voted for the death ceiling legislation in a single bill. However, of the last 48 votes on the debt limit, only 40 percent were independence measures. Another 60 percent of the time – credit proposals were included in other laws. So, Trump wants to follow that trend.
House Speaker Mike Johnson (R-LA) said last week that the debt hike would be part of a larger bill that would enact much of Trump’s agenda. It may not be possible to get enough Senate Republicans on board.
Trump’s idea was to have a single bill that would include the debt increase, the extension of the 2017 tax cuts, and the energy supply and border policy. To pass the upper chamber, almost all Republican senators would have to vote for the legislation.
Quid Pro Quo
For conservative senators, Trump’s first plan is a bridge too far. They said the debt hike must be contingent on $2 trillion in spending cuts.
On the other hand, Trump’s team may have trouble reaching that number. Elon Musk, charged by Trump to reduce government spending, admitted that cutting $ 2 trillion may not be possible.
“I think we’re going to try $2 trillion, I think that’s like a very good outcome,” Musk said on the live stream. interview on X last week. “But I think you should go further. If you try two trillion you have a good chance of getting it.”
The Buckeye Passes
Trump is not happy that the debt was not raised last month. He wanted this measure to be taken so that President Joe Biden could sign it into law – instead of him.
“Raising the debt level is not good, but we’d better do it on Biden’s watch,” Trump and running mate JD Vance said in a joint statement.
The president-elect was confused by his party when the conservatives refused to approve the funding he proposed which included the increase in debt.
Trump recently told Senate Majority Leader John Thune (R-SD) that removing the debt limit is in his hands.
“The debt ceiling has arrived. He’s not happy that that’s hanging out there, and he’s made it a problem for Thune,” a senator who met with Trump and Thune told The Hill. “He said, ‘John, I don’t know how you will solve this problem, but you will think of some way..”
Reconciliation Ends
The latest strategy to increase the credit rating is to use a method called reconciliation.
Normally it would take 60 votes in the caucus to pass the debt limit. However, by using the conciliation process, only a small majority will be required. There are currently 53 Republicans in the Senate. If four or more refuse to go along with the GOP plan – there will be a deadlock. That could lead to negotiations with Democrats — something the Republican leadership doesn’t want.
“If it works with a regular order or a regular process and as an independent, or as part of a budget, for example, you have to have both sides negotiating, and we feel like we are in a better position to do it ourselves,” Johnson said in a press conference last week.
Attached Cables
Another option Johnson is considering is attaching a debt increase to help fund the law for victims of the wildfires in Southern California. However, that saw strong pushback from California congressmen and other GOP members.
“We will not support disaster relief situations,” Representative Pete Aguilar said at a press conference Tuesday. “We didn’t set any bias criteria for Florida or Louisiana or the Carolinas when we gave aid. Party conditions are unhelpful and will hinder aid, and more importantly, delay needed aid to the American public. “
Republican Senators Rick Scott of Florida and Thom Tillis of North Carolina joined the group call for help in California with no conditions attached. Several hurricanes hit Florida last year. In addition, both Florida and North Carolina were heavily damaged by Hurricane Helene in September. Relief for victims of such natural disasters is authorized by Congress with no strings attached.
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