Fed & White House Agree on Economy, Split on Rates

Beneath the public clash over interest rates, a surprising consensus is forming between the Trump administration and the U.S. Federal Reserve on the near-term economic outlook.

While President Donald Trump has loudly called for deep rate cuts, both his economics team and officials at the central bank now largely agree on several key points: a potential productivity boom could boost the economy without fanning inflation, tariffs are unlikely to cause persistent price pressures, and overall economic growth remains solid.

The alignment isn't perfect. The crucial divide lies in how to manage risk. The administration wants an aggressive bet on productivity to justify immediate rate cuts. The Fed, on the other hand, is demanding more proof, particularly as inflation has remained above its 2% target for the past year.

A Hidden Consensus on the U.S. Economy

Fed Chair Jerome Powell, speaking after the central bank held its benchmark interest rate steady in the 3.50% to 3.75% range, sketched an optimistic view of the economy. This marks a significant shift from a year ago when concerns about slowing growth and trade wars dominated the policy debate.

While Powell’s tone was measured, his outlook shared key themes with top administration officials, even as the Fed resists calls for rapid rate reductions.

The decision to hold rates was not unanimous. Two policymakers, Governor Christopher Waller and Governor Stephen Miran, both Trump appointees, dissented in favor of a rate cut at the January meeting. However, Powell described the sentiment to hold rates steady for now as "broad" among the Federal Open Market Committee’s 19 members.

The current pause on rates is less about a fundamental disagreement on the economy's direction and more about how to weigh the forces shaping it.

Productivity and Tariffs: The Core of the Outlook

Both sides are closely watching productivity and the impact of tariffs, seeing them as central to the economic forecast.

Tariffs as a One-Time Price Shock

On tariffs, the Fed’s view is that while they have pushed up some prices, the effect is temporary.

"Ultimately, we think those will not result in inflation as opposed to a one-time price increase," Powell said, adding that there's an "expectation that sometime in the middle quarters of the year we'll see tariff inflation topping out." Administration officials also believe any price impact from tariffs will be temporary and that inflation is set to decline.

The Productivity Puzzle

On the topic of productivity, the administration, led by chief economic adviser Kevin Hassett, argues that an emerging surge warrants looser monetary policy, much like the approach then-Chair Alan Greenspan took during the 1990s tech boom.

Powell acknowledged the Fed is watching this closely. "We're all over that," he stated. "No one's sitting here unaware of the possibility of higher productivity... We are well aware that higher productivity means higher potential output, and it changes the way you think about, potentially, inflation, growth, labor market."

However, he added a note of caution that defines the Fed’s current stance: "We're very clear-eyed about the possibility that this higher productivity may persist, and also that it may not." This uncertainty makes the central bank hesitant to move policy too quickly.

Powell Signals Strength, Holds Rates Steady

After a year dominated by uncertainty, Powell noted that "the economy has once again surprised us with its strength." The Fed's latest policy statement upgraded its assessment of growth, a view that contrasts with Trump's more boisterous descriptions of the U.S. as the "hottest" economy in the world but still points to a positive trajectory.

Powell said that strong consumption and business investment mean "this year starts off on a solid footing for growth." He also pointed to a curious trend: consumers are expressing negative views in surveys but continuing to spend, suggesting a disconnect between sentiment and behavior.

What Could Trigger a Fed Rate Cut?

Despite the shared economic views, tension over interest rates is unlikely to disappear. While the long-term expectation is for rates to eventually move lower, a cut in the near future would likely signal that something has gone wrong.

"If they are easing before June, something bad has happened in the economy," said Neil Dutta, head of economics at Renaissance Macro Research.

Powell noted that the current 4.4% unemployment rate appears to be "stabilizing," with risks to the job market diminishing compared to last year. According to Dutta, a few main scenarios are in play for the Fed's next moves:

• No Cuts This Year: If growth and the job market outperform expectations while inflation remains stuck, the Fed might not cut rates at all.

• Gradual Cuts: If inflation slows as policymakers anticipate, the Fed could begin a series of gradual rate cuts.

• Quicker Cuts: If growth falters and the unemployment rate rises, the Fed would likely respond with faster rate reductions.

The next major data point will be the January jobs report. "Corporate labor market news does not feel great at the moment," Dutta cautioned, noting a recent slide in consumer confidence about the job market. "When consumers say labor market conditions are worsening, it usually pays to believe them."