Donald Trump’s policies are likely to keep inflation high putting a damper on future rate cuts, according to Federal Reserve (Fed) economists. Meanwhile, Republicans in Congress are groping for a way to raise the debt ceiling in order to fund those policies.
Fed Minutes
The inflation assessment came with the release of minutes from the Federal Reserve’s December meeting last week. Fed economists factored president-elect Donald Trump’s campaign pledges into their forecast.
Instead of identifying Trump, the economists adopted a Harry Potter-like approach (Lord Voldemort was referred to as “he who shall not be named”) by referring to an unnamed placeholder. Oddly, placeholder programs, such as reduced taxes and deregulation along with blanket tariffs and the largest mass deportation in American history, are exactly the same as Trump’s.
Economic Boomerang
Trump railed against high prices and high inflation on the campaign trail. However, the Fed minutes show staff are concerned that Trump’s policies may actually hike inflation, slow economic growth, and raise unemployment.
“The risks around the inflation forecast were seen as tilted to the upside,” the minutes recorded, “as core inflation had not come down as much as expected in 2024 and the effects of trade policy changes could be larger than the staff had assumed.”
In addition, records from the December meeting “noted that recent higher-than-expected readings on inflation, and the effects of potential changes in trade and immigration policy, suggested that the process (of lowering rates) could take longer than previously anticipated.”.
Lower GDP and Higher Unemployment
Further, the Fed staff sees a decline in Gross Domestic Product (GDP) and jobs as a result of Trump’s policies.
GDP is a measure of the value of the goods and services produced by a country. Generally, the higher a nation’s GDP – the better its economy.
The Fed minutes state: “After incorporating the recent data and preliminary placeholder assumptions about potential policy changes, real GDP growth was projected to be slightly lower than in the previous baseline forecast, and the unemployment rate was expected to be a bit higher.”
Wait and See
Fed officials have been loath to voice public concerns about the president-elect’s plans. However, the minutes show that “most participants” in the December Fed meeting urged a “careful approach” to considering future rate cuts.
Some Fed watchers had been expecting a couple more quarter-point rate cuts in 2025. However, the Fed minutes show that the national bank is taking a wait-and-see approach. The wait is to see if Trump follows through on his promises/threats and, if he does, what effect they may have on inflation, jobs, and consumer prices.
The Fed has cut rates a total of one percent since September.
Raising The Debt Ceiling
Raising the debt ceiling was not incorporated in the Fed staff projections. However, it is a vital part of funding Trump’s agenda. It is also key to keeping the government running.
Once upon a time, Congress voted on debt ceiling legislation in a single bill. However, of the last 48 debt limit votes, only 40 percent were stand-alone measures. The other 60 percent of the time – debt ceiling proposals were encompassed in other legislation. Consequently, Trump wants to follow that trend.
House Speaker Mike Johnson (R-LA) said last week that the debt ceiling hike would be part of a larger legislative package that would authorize much of Trump’s agenda. It may be impossible to get enough Republicans in the Senate on board.
Trump’s idea was to have one bill that would include the debt ceiling hike, extension of 2017 tax cuts, along with energy provisions and border policy. To pass the upper chamber, almost every Republican senator would have to vote for such legislation.
Quid Pro Quo
For conservative senators, Trump’s original plan is a bridge too far. They have said a debt ceiling hike must be contingent on $2 trillion in spending cuts.
On the other hand, Trump’s team may have a problem reaching that number. Elon Musk, charged by Trump with cutting government costs, has admitted that cutting $2 trillion may be impossible.
“I think we’ll try for $2 trillion, I think that’s like the best-case outcome,” Musk said in a livestream conversation on X last week. “But I do think that you kind of have to have some overage. If you try for two trillion you have a good shot at getting one.”
The Buck Passes
Trump has been unhappy that the debt ceiling was not raised last month. He wanted the action taken so President Joe Biden would sign it into law – instead of him.
“Increasing the debt ceiling is not great but we’d rather do it on Biden’s watch,” Trump and his running mate J. D. Vance said in a joint statement.
The president-elect was bucked by his own party when conservatives refused to approve a funding measure he had proposed that included a debt ceiling increase.
Trump recently told Senate Majority Leader John Thune (R-SD) that getting the debt limit impasse cleared is in his hands.
“The debt limit came up. He’s very unhappy that that’s hanging out there, and he made it Thune’s problem,” a senator who met with Trump and Thune told The Hill. “He said, ‘John, I don’t know how you’re going to solve this problem, but you’re going to figure out some way.”
Reconciliation End Around
The latest strategy to get the debt ceiling raised is to use a measure called reconciliation.
Normally it would take 60 votes in the senate to pass a debt ceiling limit. However, by using the reconciliation process, only a simple majority would be needed. Currently there are 53 Republicans in the senate. If four or more refuse to go along with the GOP plan – there would be a deadlock. That could lead to negotiations with the Democrats – something the Republican leadership does not want.
“If it runs through regular order or regular process and as a standalone, or as part of the appropriations, for example, then you have to have both parties negotiating, and we feel like we’re in better a stead to do it ourselves,” Johnson said at a press conference last week.
Strings Attached
Another avenue Johnson is considering is attaching a debt ceiling hike to legislation funding relief for victims of the Southern California wildfires. However, that has seen strong pushback from California’s members of Congress as well as some GOP senators.
“We will not support conditions to disaster assistance,” Representative Pete Aguilar told a press conference Tuesday. “We did not put partisan conditions on Florida or Louisiana or the Carolinas when we offered aid. Partisan conditions are not helpful and will distract from the help, and more importantly, delay the help that’s necessary for the American public.”
Republican senators Rick Scott of Florida and Thom Tillis of North Carolina have joined the call for aid to California without conditions attached. Several hurricanes hit Florida last year. In addition, both Florida and North Carolina suffered extensive damage from Hurricane Helene in September. Aid for victims of those natural disasters was approved by Congress without strings attached.
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