Federal Reserve Chairman Jerome Powell indicated on Wednesday that the robust state of the US economy allows the central bank to exercise caution when it comes to rate reductions. "The US economy is in excellent condition, and there's no reason to believe this won't persist," Powell stated at an event organized by The New York Times. "The encouraging news is that we have the luxury to be somewhat more prudent" regarding decisions on interest rate adjustments, the Fed chief remarked.

His comments arrive as the Fed is anticipated to lower interest rates for the third time this year later this month. The central bank initiated a reduction in borrowing costs in September following a slowdown in inflation and a cooling of the job market. However, despite the Fed's actions, borrowing has not become significantly cheaper. This is because interest rates for the majority of loans, including mortgages and credit cards, are tied to the yield on the 10-year US Treasury note. That yield surged last month to its highest level since the summer and has only slightly declined this week.

Even though the Fed has been successful in reducing inflation over the past two years, expectations that President-elect Donald Trump's proposed economic policies could reignite inflation have caused bond yields to rise. Trump has promised to impose substantial tariffs on America's three largest trading partners, which economists widely anticipate will increase prices for consumer electronics, produce, and certain types of alcohol. If these duties are implemented, they are likely to result in faster inflation, prompting a response from the Fed, either by halting rate cuts or potentially raising rates once more.

Powell mentioned that there are still too many uncertainties for the Fed to seriously consider any repercussions from high tariffs, such as which specific goods will be affected by tariffs and the duration of any new trade policies. Joseph Brusuelas, Chief Economist at RSM US, stated that he does not foresee another rate cut after December until at least March 2025.

Trump pledged last week to impose a 25% tariff on imports from Mexico and Canada and an additional 10% duty on Chinese goods on the first day of his second term. This move could cause consumer prices to increase by 0.75% next year, according to an estimate by economists at the Yale Budget Lab. The latest tariff proposal would equate to a loss of approximately $1,200 in purchasing power per household, in 2023 dollars, based on the estimate. Prices would rise slightly less, by 0.65% next year, if Americans opt to purchase domestically produced goods or goods from countries with lower tariffs. This also suggests that "consumers will not be able to find substitutes for nearly everything being tariffed," according to the analysis.

Nevertheless, some Fed officials have expressed that they do not wish to preemptively judge the situation. "The incoming administration and Congress have not yet enacted any policies, so it is premature to make judgments," Fed Governor Adriana Kugler said on Tuesday at an event in Detroit. "Examining the specifics, when they are revealed, will be crucial, as trade policy may impact productivity and prices."

Atlanta Fed President Raphael Bostic advised his team of economists and forecasters to "wait as long as possible" before developing any economic models to assess the potential effects of different tariff scenarios on the US economy. "When I first arrived, our team was running models and doing all of this, and then three days later, there'd be another proposal, and then two days later, there'd be another one," Bostic recounted on Monday in a call with reporters. "Given that we have limited resources, I want to ensure that we're focusing most of our efforts on outcomes that are most likely to occur."

For the time being, the Fed appears to be on course for a third rate cut this year. Wall Street is pricing in a 76% probability that the central bank will cut rates by a quarter point at its December 17-18 meeting, according to the futures market. After experiencing a slowdown throughout the summer, recent inflation readings have been slightly higher, but economists and Fed policymakers still believe a downward trend is in place.

Powell has previously stated that the journey of inflation towards the Fed's 2% target is likely to be uneven. "At present, I lean towards supporting a cut to the policy rate at our December meeting," Fed Governor Christopher Waller said on Monday at an event sponsored by the American Institute for Economic Research. "However, that decision will depend on whether the data we receive before then surprises us positively and alters my forecast for the path of inflation."

When Trump takes office next month, the Fed will have to deal with more than just a plethora of new trade policies. It will also likely confront the potential intrusion of a sitting US president into its policy decisions. A Wall Street Journal report earlier this year revealed that Trump's economic advisors drafted a plan to erode the Fed's independence by giving the president greater influence over the central bank's decisions on interest rates.

However, the Fed's ability to operate independently from political pressure is highly valued by investors and economists, as it allows the central bank to make data-driven decisions without having to consider the sitting president's approval ratings. It is also a deeply ingrained tradition within the Fed. "The independence of the Fed is vital to the integrity of the US dollar," billionaire investor Ken Griffin, CEO of Citadel, stated on Wednesday at the New York Times' DealBook Summit.

Powell expressed his expectation of having a positive relationship with the incoming Trump administration, including with Scott Bessent, whom Trump has nominated to serve as his Treasury secretary. Bessent has previously suggested that Trump could name Powell's successor well in advance of his retirement in mid-2026 as a strategy to diminish Powell's influence.