Trump is about to make the Fed's job a lot harder

• Trump's election victory is set to make the Fed's job more difficult.
• His tariff and immigration plans are expected to stoke inflation, complicating the Fed's policy decisions.
• Trump has also said he would like a say in setting monetary policy, which would erode Fed independence.

The Federal Reserve could soon encounter a roadblock in its plans to keep the US economy going while also controlling inflation.

Donald Trump's election win brings his vision of hefty trade tariffs and a sweeping immigration crackdown closer to becoming reality.

Economists widely view the proposals as inflationary, and markets seem to agree, with Fed fund futures and Treasury yields responding in kind. It presents the Fed with a conundrum: At a time when it's just getting started with long-awaited interest-rate cuts, the prospect of higher inflation could now give it pause. After all, the Fed's primary tool for fighting inflation has been rate hikes.

While traders feel certain the Fed will deliver a 25-basis-point cut at the conclusion of this week's meeting, the outlook becomes murky after that.

According to the CME FedWatch tool, the odds of another 25-point cut in December have dropped from 83% at the start of the month to 71% on Thursday. The odds of a similar rate-lowering at the January meeting are also down, from 44% on November 1 to 28% on Thursday.

Treasury yields, meanwhile, soared the day after the election, with the 10-year bond yield rising as much as 21 basis points to its highest level in months, while the yield on the 30-year bond jumped the most since March 2020.

Glen Smith, chief investment officer of GDS Wealth Management, said Thursday's expected rate cut could be the last "for some time."

"The Fed's commentary about the outlook for rate cuts going forward will be particularly important for markets, given the recent post-election surge in bond yields, which undoubtedly complicates the Fed's efforts to move to a less restrictive policy stance," Smith said, adding that markets are pricing in continued government spending and widening deficits.

Leading up to the election, economists warned that Trump's economic agenda, which includes up to 20% tariffs on imports and 60% tariffs on goods from China, would stoke higher prices, while his immigration crackdown would spur higher wage growth.

Both of those things are factors the Fed fought hard to control as it sought to cool the economy down for two years before finally cutting rates in September.

"The tariff issue is enormous," Nobel economist Paul Krugman said recently. "We're talking about an inflationary shock that is bigger than almost anything else you could do through federal policy."

Still, the prospect of more inflation is not yet fully confirmed. Consumer prices stayed relatively stable during Trump's first presidential term, which saw him locked in trade war with China. The counter to that argument is that Trump wants to be far more aggressive with tariffs this time around, and focus them internationally, rather than solely on China.

A less independent Fed

Trump, meanwhile, could take steps to wrest control from the central bank when it comes to making policy decisions.

While campaigning, allies of the president-elect were reportedly making plans to erode Fed independence, which would include inserting the president into the rate-setting process and potentially firing Fed Chair Jerome Powell before his term is up in 2026.

A study from the Peterson Institute of International Economics said that interfering with the Fed's independence could cost the economy $300 billion and drive inflation higher.

As markets turn to the conclusion of the Fed meeting on Thursday, there's some expectation that Powell could nod to the coming Trump presidency as he lays out the Fed's plans for the future, though economists at Pantheon Macroeconomics said this is unlikely.

"Mr. Powell will be wary of giving strong signals about the future direction of policy in the press conference, as second-guessing what President-elect Trump will do next always has been a hostage to fortune," the firm wrote.

They continued: "The Fed Chair likely will conclude that striking a diplomatic and uncritical tone offers the best chance of maintaining the Fed's independence over the next four years."