Federal Reserve Chair Jerome Powell said Friday that the central bank is working to separate “the signal from the noise” in order to formulate its monetary policy amid a flurry of new initiatives and policy announcements from the Trump administration during its first weeks in office.
“The new administration is in the process of implementing significant policy changes,” Powell said. “We are focused on separating the signal from the noise as the outlook evolves. We do not need to be in a hurry.”
Powell said that “uncertainty around the changes and their likely effects remains high.”
The Trump administration has issued a number of stop-and-start orders on tariffs, increased border enforcement, and made significant cuts to several regulatory agencies — all of which will have economic effects that the Fed must consider.
Congressional Republicans are also working to pass wide-ranging tax cuts that will also have monetary implications over the long term. They entail cuts to individual tax rates, which could affect consumer spending, as well as business cuts that could affect production and output levels. Tax cuts generally have a stimulative effect upon the economy.
The various legislative and executive actions promise to interact with each other economically in ways that are not yet known, further adding to the Fed’s uncertainty.
President Trump kicked off a trade war this week by imposing 25-percent tariffs on Canada and Mexico — countries with which the U.S. has had a comprehensive trade agreement since the 1990s. He also increased tariffs on China to 20 percent from 10 percent.
Trump then temporarily exempted carmakers, an industry with highly integrated North American production pipelines, from the new tariffs. In a separate announcement, he then further backtracked, exempting many goods covered by the U.S.-Mexico-Canada Agreement — the update to the NAFTA deal that Trump renegotiated during his first term.
Tariffs are taxes on U.S. importers of foreign goods. Companies can eat the cost of the taxes, find ways to avoid them, or pass them onto consumers. This can affect price and consumption levels that the Fed has to account for when determining the level of interbank interest rates, the money supply and the balance of its reserves.
The Fed has paused its interest rate cuts, which it started last fall after keeping them elevated for a year in response to inflation. It has been increasing the money supply, with the M2 measure registering $21.5 trillion in January.
Bank reserves have been hovering around $3.2 trillion for the past few years, and the Fed’s balance sheet of securities has been trimmed to $6.8 trillion from a high of around $9 trillion in 2022.
In addition to uncertainties related to policies, the Fed is also facing some variability in macroeconomic conditions.
Prices across the economy have been trending up in recent months, suggesting that inflation may still have some life left in it.
Consumer sentiment took a dive in January and inflation expectations among the public for the year ahead popped above 4 percent, registering the highest level since 2023 in the benchmark University of Michigan consumer survey.
Consumers also pulled back on spending in January, as measured by the Commerce Department. The Atlanta Fed’s first-quarter GDP forecast is currently clocking a substantial contraction at negative 2.4 percent growth as of Thursday.
