Tariffs and DOGE Paint Murky Picture for Fed — Evening Brief – 02.26.25
The central bank’s task is always complex, but the current situation makes it particularly challenging. On top of the typical factors that affect monetary policy—like sifting through often conflicting economic signals—it’s now got to grapple with a barrage of White House orders throwing wild cards into the mix. President Trump’s agenda, from tariffs to DOGE cuts, has left it murky how the Fed’s adjusting its lens, if at all.
Apollo’s chief economist Torsten Sløk notes that while the incoming US economic data remains strong, he’s concerned about the downside. “We are starting to worry about the downside risks to the economy and markets from: 1) the impact of DOGE layoffs and contract cuts on jobless claims and 2) persistently elevated policy uncertainty weighing on capex spending decisions and hiring decisions.”
Meanwhile, Stephanie Roth, chief economist at Wolfe Research, is taking a cooler-headed approach on the Department of Government Efficiency (DOGE) push to drastically reduce the federal workforce. Roth figures the widespread terminations DOGE is aiming for won’t negatively impact economic growth on their own. “It’s not going to tip the economy into recession by itself,” she said.
President Trump doubled down on his tariff plans on Tuesday, confirming that levies on Canada and Mexico are set to roll out next week. “The tariffs are going forward on time, on schedule,” he declared, signaling no last-minute reprieve despite a month-long pause earlier in February after talks with both nations
Trump’s tariff rollout could throw a curveball at inflation—maybe just a short-lived spike, but it’s in the cards. Economists are split on how big the jolt might be, with goods like Canadian lumber or Mexican auto parts potentially nudging prices up if those 25% levies bite. The Fed’s reaction? That’s the million-dollar question. No one’s sure if the Federal Reserve will react or be patient, but Fed funds futures are betting on steady rates at the March 19 FOMC meeting, keeping the target range at 4.25%to 4.50%.
The policy-sensitive U.S. 2-year Treasury yield seems to agree that policy is for now appropriate. This key rate, which is considered a benchmark for tracking expectations of future Fed decisions, has fallen to 4.10%; that’s 28 basis points in 11 trading days, sitting at its lowest close since December. That slide below the median effective Fed funds rate hints at a dovish tilt.
Whether the Fed thinks its current policy stance is the right call moving forward is the big question. Friday’s PCE inflation report for January could tip the scales. Last month’s CPI came in “sticky,” spooking some with a 2.9% year-over-year jump, but economists are betting this PCE read will be softer—maybe around 2.4% headline and 2.7% core, based on whispers from Dow Jones and Cleveland Fed nowcasts. That’s still above the Fed’s 2% goal, but a step down could ease nerves.
But January’s PCE data might as well be a relic by now, given how fast the White House is churning out policy shifts. The challenge for the Fed lies in the fact that the impact of tariffs and DOGE decisions will begin to unfold in the coming months, while monetary policy typically works with long and unpredictable delays. This creates a complex dynamic for the Fed as it tries to respond in real time to emerging economic conditions.