During this week's monetary policy meeting, Federal Reserve Chair Jerome Powell and other Fed officials are likely considering the potential impact of President-elect Donald Trump's return to the White House on the economy's soft landing. A soft landing is a scenario where inflation decreases without a significant rise in the unemployment rate, a situation that has been successfully maintained so far.
The Fed's preferred inflation gauge is currently just slightly above its 2% target, a significant improvement from June 2022 when it reached a 40-year high of 7.2%. Despite the Fed's efforts to combat inflation by raising interest rates starting in March 2022, the unemployment rate has only seen a modest increase from 3.6% in June 2022 to 4.1% in October of this year.
However, concerns arise regarding the potential impact of Trump's proposed tariffs on all imports, which could lead to another spike in inflation. Such a scenario might prompt the Fed to adjust its policy stance, potentially resulting in further interest rate hikes. This, in turn, could lead to an increase in unemployment rates as businesses adjust to the changing economic landscape.
The ability of the Fed to navigate these challenges and maintain a soft landing for the economy will be closely watched in the coming months as policymakers strive to balance inflation control with economic growth and employment stability.
