The Trump economic era may be underway, but as far as the Federal Reserve is concerned, it's steady as she goes in the week ahead. Beyond this week, though, things may not be as certain.
The central bank prides itself on its responsiveness to the national economy. Its policymakers aren't shy about changing tactics in order to work toward their two mandates of stable prices and maximum employment. That flexibility could be tested as they confront an emboldened president with little patience for past ceremony.
The Fed raised its target short-term interest rate at its last meeting in December and signaled that it expected to gradually raise rates this year. In the week ahead, the group meets for the first time since that decision. It is doubtful the bank will hike its interest rate at this two-day meeting. However, with fiscal uncertainty growing, it will be more than a bit interesting to see how the Fed characterizes its outlook.
In two weeks, President Trump is expected to unveil his budget proposal. It's expected to include tax cuts, new national security investments and billions of dollars of new spending on infrastructure like bridges, tunnels and roads. It's likely to include some budget cuts but not enough to make up for his spending appetite. How he proposes to pay for his plans will determine how much money the federal government will have to borrow and add to the national debt.
The Fed is watching for more government borrowing that doesn't add to sustainable economic growth. Earlier this month, Lael Brainard, a member of the Fed's board of governors, warned that with the economy near full employment and 2 percent annual inflation, interest rate increases would do a better job than government-introduced tax cuts in encouraging consumer spending.
That's why the Fed is interested in slowly and carefully raising rates. The coming Trump economic blueprint may challenge that plan.
