The Federal Reserve isn’t basing its decisions about interest rates on speculation about Trump administration policies such as potential tax cuts, Chairwoman Janet Yellen said Wednesday.
The Fed’s decisions are “nothing that’s speculation about pre-emptive responses to future policy moves,” Yellen said at a press conference in Washington. “We have plenty of time to see what happens.”
Individual members of the central bank have “penciled in” the prospect of possible Trump policies such as tax cuts or new infrastructure spending, Yellen said. But the Fed’s decision Wednesday to raise interest rate a quarter-point reflects “simply our assessment of today’s economy,” not possible future stimulus.
The Fed’s reaction to potential fiscal stimulus — tax cuts or more spending — is important because, in theory, it could counteract some of the economic effects of those actions. For example, many investors would see lower taxes as a boost to the economy. But if the Fed saw lower taxes as risking overheating the economy and driving up inflation, they might react by raising interest rates faster to curb spending, canceling out the stimulus effect.
Yellen on Wednesday downplayed the possibility of the Trump administration and the Fed being at odds over stimulus, saying “I don’t believe it is a point of conflict.”
In January, however, Yellen stated that fiscal stimulus was no longer needed, a reversal of her recommendations of the past several years.
While many investors have upgraded their economic forecasts in the wake of Trump’s election, Yellen’s comments indicated that the Fed has not.
There’s too much uncertainty about the timing, composition and specifics of any major fiscal package to speculate about economic effects, she said.
