By Howard Schneider
WASHINGTON, Jan 29 (Reuters) – The wide gulf between the Trump administration and the U.S. Federal Reserve over where interest rates ought to be masks the fact that the two sides have begun to share a consensus about the near-term economic outlook.
Both those inside the central bank and President Donald Trump’s economics team are looking to productivity to boost the economy without increasing price pressures, and in general agree that tariffs won’t cause persistent inflation and have an expectation for continued solid economic growth.
The alignment is not perfect, and there is a particularly big gap in attitudes about how to manage risks. The administration argues for an all-in bet on productivity tempering inflation and allowing immediate and deep Fed rate cuts, while Fed officials want more proof given that inflation is still above their 2% target and hasn’t made any meaningful progress for a year.
But the outlook sketched by Fed Chair Jerome Powell on Wednesday after the central bank held its benchmark interest rate steady in the 3.50% to 3.75% range was an optimistic one, a contrast to the concerns about slowing growth and a debilitating trade war that dominated the Fed’s policy debate a year ago as Trump took the first steps in his effort to reorder the global economy.
Though not overtly bullish or designed to cheerlead, the Fed outlook also shared key points made by top administration economic officials, even if central bank policymakers aren’t rushing to comply with Trump’s call for fast and deep rate reductions.
Two policymakers dissented in favor of a rate cut at the January meeting, including Governor Christopher Waller, a Trump appointee under consideration to become chair – a decision Trump on Thursday said could come next week – and Governor Stephen Miran, a Trump appointee on leave from a job at the White House. Powell, however, described the sentiment in favor of holding rates steady for now as “broad” among the 12 voting and seven non-voting members of the Federal Open Market Committee.
PRODUCTIVITY CHANGES THE WAY YOU THINK
Yet the pause on rates now rests less on differences of opinion with the administration about the economy and more on how to weigh the various risks it is facing and the forces shaping the outcome.
In the Fed’s view, for example, tariffs have pushed up goods prices, but “ultimately, we think those will not result in inflation as opposed to a one-time price increase…There’s an expectation that sometime in the middle quarters of the year we’ll see tariff inflation topping out” and headline inflation declining, Powell said on Wednesday. Administration officials may disagree over the source of current inflation, currently running about 1 percentage point above the Fed’s 2% target, but they agree any impact of tariffs is temporary and that inflation is due to decline.
On productivity, administration officials and particularly chief economic adviser Kevin Hassett say a developing surge warrants looser monetary policy, akin to how then Chair Alan Greenspan responded to developments in the 1990s as computer technology spread.
“We’re all over that,” Powell said. “No one’s sitting here unaware of the possibility of higher productivity. We’ve been talking about it for three years…We are well aware that higher productivity means higher potential output, and it changes the way you think about, potentially, inflation, growth, labor market.”
But “we’re very clear-eyed about the possibility that this higher productivity may persist, and also that it may not,” Powell said, reflecting caution in moving monetary policy too fast in response.
And after a year when the outlook seemed dogged by uncertainty, “the economy has once again surprised us with its strength, not for the first time,” Powell said, following a release of a Fed policy statement that upgraded the view of growth.
It may be less boisterous a view than Trump’s descriptions of the U.S. as the “hottest” economy in the world.
But with the combination of ongoing consumption and business investment, “this year starts off on a solid footing for growth,” Powell said on Wednesday. Loosening credit conditions and rising asset prices have supported consumer spending among the better off, while even families with a dour outlook are “filling out surveys that sound really negative, and then spending. There has been a disconnect for some time between downbeat surveys and reasonably good spending data.”
‘IT USUALLY PAYS TO BELIEVE THEM’
Even if there are some shared views about the economy’s near-term trajectory, the tension between the administration and the Fed over interest rates isn’t likely to fade, perhaps even after Trump appoints a new chair to take over from Powell by the June 16-17 meeting.
While the direction of Fed interest rates is still expected to be lower over time, for the central bank to cut any time soon, data on the job market and unemployment would probably have to take a turn for the worse.
“If they are easing before June, something bad has happened in the economy,” said Neil Dutta, head of economics at Renaissance Macro Research.
Powell on Wednesday said the current 4.4% unemployment rate seemed to be “stabilizing,” and that the risks of a shock to the job market appeared to be diminishing compared with last year, when the jobless rate was on a slow but steady climb from recent historic lows.
Among the main scenarios that seem to be in play, Dutta wrote, one path could see the Fed not cutting at all this year if growth and the job market outperform and inflation remains stuck; one could see the Fed cutting gradually if inflation slows as policymakers anticipate; while a third would see the Fed catching up with quicker rate cuts if growth disappoints and the unemployment rate rises.
Jobs numbers for January are released next Friday.
“Corporate labor market news does not feel great at the moment,” Dutta said, noting a recent slide in consumer views of the job market. “When consumers say labor market conditions are worsening, it usually pays to believe them.”
(Reporting by Howard Schneider; Editing by Dan Burns and Andrea Ricci )
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