As Trump adds complications, is the Fed set to adopt a new strategy?
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As Trump adds complications, is the Fed set to adopt a new strategy?
Under the impact of data and Trump's policies, it would be particularly "awkward" if Powell continues to stick to his original tone...
Navigating Web3 tides with focused insightsBy Yang Dapang
Economists say that the uncertainty stemming from U.S. President Trump's tariff policies is making it difficult for the data-dependent Federal Reserve to send clear signals about the economic outlook.
With new data released last week showing February inflation slowed more than expected, the Fed is preparing to announce its latest interest rate decision on Thursday. Yet policymakers are also weighing concerns over whether the Trump administration’s promised trade tariffs could trigger inflation or an economic slowdown. Joe Brusuelas, chief economist at RSM US, said: “The promise of future tariffs actually undermines the Fed’s data-dependent approach, meaning they’ll have to rely more heavily on forecasting frameworks.”
Although markets widely expect the Fed to hold rates steady this week, investors will closely examine officials’ economic projections and Chair Jerome Powell’s post-meeting statement.
In recent years, the Fed has insisted it is “data-dependent,” focusing more on the latest inflation and growth figures rather than forward-looking models. This stance has become increasingly prominent as the Fed seeks to maintain credibility after failing to predict the inflation surges in 2021 and 2022. Policymakers argue that being data-dependent helps them stay flexible.
However, some economists worry that in an environment of rising political and economic uncertainty, relying on backward-looking data may leave the Fed playing catch-up—especially since price pressures from anticipated tariffs may take time to show up in the data.
Vincent Reinhart, chief economist at BNY Investments, said the unexpectedly mild inflation reading in February would make Chair Powell’s messaging “more awkward,” as it becomes “harder to fully justify” holding rates steady based purely on data, and might even prompt an upward revision to future forecasts on Wednesday.
He added that the latest inflation report is a “rearview mirror reading” that only partially captures the impact of Trump’s proposed trade tariffs. Tariffs on foreign goods were in effect for only part of the month and may not yet be reflected in consumer prices.
Brusuelas said the Fed faces a “difficult policy position,” as tariffs on some of the country’s largest trading partners could simultaneously increase price pressures and weaken the U.S. labor market—two outcomes requiring completely opposite responses from the central bank.
Thomas Ryan, North America economist at Capital Economics, said Trump’s shifting economic policies could also affect how policymakers weigh different economic indicators. He expects the Fed to place less emphasis on price levels—a “backward-looking” measure of inflation—and instead shift focus toward consumer inflation expectations, which have begun rising since the start of the year.
Fed officials will also consider a disappointing nonfarm payrolls report showing the economy added only 151,000 jobs in February, below expectations, fueling concerns about slowing growth. Powell previously downplayed such worries, insisting the economy remains “in good shape” despite “elevated levels of uncertainty.”
But James Knightley, chief international economist at ING, said this kind of uncertainty—marked by repeated U-turns in economic and trade policy—means the Fed will remain “on the back foot” and “unable to plan or take strong positions.”
The Trump administration’s dizzying policy shifts have already triggered a stock market sell-off and raised corporate concerns. Major U.S. airlines American Airlines, Delta Air Lines, and Southwest Airlines warned this week that demand is slowing due to consumer uncertainty about the U.S. economic outlook. Meanwhile, Wall Street’s benchmark S&P 500 index briefly entered correction territory last week before recovering slightly.
David Wilcox, former Fed staff member now at the Peterson Institute for International Economics, said, “We know with certainty that everyone—businesses, households, and monetary policymakers—hates uncertainty.”
Yet Wilcox said Fed officials will largely avoid any direct references to Trump’s economic agenda, aside from “tactfully alluding” to the challenges posed by uncertainty. “I suspect one of Powell’s key objectives will be to stay low-key and avoid being seen as offering any immediate commentary on government policy,” he said.
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