The Fed’s main economic model reinforces this deliberate approach. First, higher tariffs enter the model only once they’re likely to be in place. Second, the model assumes that the monetary-policy response will be consistent with the Fed’s employment and inflation objectives and that businesses and households will fully anticipate such a response. This rules out systematic policy errors, mitigates the impact of economic shocks and ensures that inflation expectations remain well anchored in the model — lowering the perceived cost of waiting. Thus, what Trump does will take considerable time to influence actual policymaking.
The US Federal Reserve and its chair, Jerome Powell, are rightly choosing not to act on any assumptions about what Donald Trump might do as president. That said, if he follows through on his more extreme campaign promises, they’ll struggle to contain the economic consequences — a problem that equity investors ignore at their peril.
The president-elect has been sharply critical of Powell, whom he appointed in 2018. Yet at the first Fed news conference since the election, Powell emphasized that Trump lacks the legal authority to fire him before the May 2026 end of his term, which he plans to serve out. He wisely avoided speculation about how Trump’s promises of higher tariffs, mass deportations and lower taxes might influence monetary policy. The Fed, he said, analyzes the effects of such measures at the proposal stage, but doesn’t consider them in its policymaking until they become law: “We don’t guess, we don’t speculate, and we don’t assume.”
