• Donald Trump’s election victory is likely to make the Federal Reserve’s work more difficult.
• His tariff and immigration plans are expected to stoke inflation and complicate the Fed’s policy decisions.
• Trump has also said he would like to have a say in setting monetary policy, which would undermine the Fed’s independence.

The Federal Reserve may soon hit a roadblock in its plans to keep the U.S. economy afloat while controlling inflation.

Donald Trump’s election victory brings his vision of high trade tariffs and a comprehensive crackdown on immigration closer to reality.

Economists widely view the proposals as inflationary, and markets appear to agree, with Fed funds futures and Treasury yields reacting in kind. It presents the Fed with a conundrum: At a time when it is just beginning long-awaited interest rate cuts, the prospect of higher inflation could now give it pause. After all, the interest rate is the Fed’s most important tool for fighting inflation Hikes.

While traders are certain the Fed will cut rates by 25 basis points at the end of this week’s meeting, the outlook after that turns bleak.

According to the CME FedWatch tool, the probability of another 25-point cut in December has fallen from 83% at the start of the month to 71% on Thursday. The likelihood of a similar rate cut at the January meeting has also fallen, from 44% on Friday to 28% on Thursday.

Meanwhile, Treasury yields jumped 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 30-year bond yield posted its biggest increase 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 on the prospects of future rate cuts will be particularly important for markets given the recent post-election rise in bond yields, which will undoubtedly complicate the Fed’s efforts to move to less restrictive policy,” Smith said, adding that the markets have priced in continued government spending and expanding deficits.

Ahead of 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 fuel higher prices, while his crackdown on immigration would drive higher wage growth.

Both are factors that the Fed struggled to control as it tried to cool the economy for two years before finally cutting interest rates in September.

“The tariff issue is enormous,” said Nobel economist Paul Krugman recently. “We are talking about an inflation shock that is larger than almost anything else that could be achieved through federal policy.”

Nevertheless, the prospect of higher inflation is not yet fully confirmed. Consumer prices remained relatively stable during Trump’s first term as president, during which he was embroiled in a trade war with China. The counter to this argument is that Trump wants to be far more aggressive with tariffs this time and focus them internationally and not just on China.

A less independent Fed

Trump, meanwhile, could take steps to wrest control of policy decisions from the central bank.

During his campaign, allies of the president-elect reportedly plotted to undermine the Fed’s independence. They proposed involving the president in the rate-setting process and firing Fed Chairman Jerome Powell before his term expires in 2026.

According to a study by the Peterson Institute of International Economics, compromising the Fed’s independence could cost the economy $300 billion and drive up inflation.

As markets head toward the conclusion of Thursday’s Fed meeting, there is an expectation that Powell could endorse Trump’s impending presidency as he lays out the Fed’s plans for the future, although economists at Pantheon Macroeconomics said that was unlikely.

“Mr. Powell will be wary of giving strong signals about the future direction of policy in the press conference, as questioning what President-elect Trump will do next has always been a hostage to fate,” the company wrote.

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