The past two days on Capitol Hill raise the prospect of a more unpredictable period for U.S. fiscal policy than seemed likely a few days ago.

Why it matters: Economists' hope has been that unified Republican control of the White House would create similar tax and spending outcomes as when they controlled those branches in 2017 — tax cuts paired with steady-as-she-goes spending.

• But after this week, volatility is the only safe prediction.
• Elon Musk appears to have remarkable power over Congressional Republicans and is dead-set on large spending cuts.
• There are also doubts about the ability of House Speaker Mike Johnson (or anyone else who might take his place) to manage a fractious caucus with a narrow majority.

Catch up quick: We defer to our friends at Axios' Hill Leaders newsletter to fill you in on the details, but the upshot is that negotiations were done on a large, complex, bipartisan bill to fund the government in the short term.

• Musk and his Department of Government Efficiency co-chair Vivek Ramaswamy came out against it, and persuaded a critical mass of House Republicans that it spends too much money and yields too much to Democratic priorities. Now both a government shutdown and Johnson losing the speakership are in play.
• To add complexity, President-elect Trump dared Congress to shut down the government if they don't raise the debt ceiling, betting that President Biden will get blamed.
• All of this is occurring at a moment when Biden is still president, Democrats control the Senate, and Johnson needs Democratic votes to pass pretty much any spending bill.

Between the lines: Musk and Ramaswamy are serious about exerting leverage on Congress, enabled by Musk's ownership of X, to achieve their DOGE spending cut goals.

• Using that leverage to seek the kinds of vast spending cuts they talked about on the campaign trail would put them on a collision course with Congress and raise the possibility of significant macroeconomic effects.
• It further raises the possibility that Musk and Ramaswamy will have significant influence on other fiscal policy decisions, such as the tax reform legislation Republicans consider an urgent priority next year.

What they're saying: "[T]his week's developments in Congress are just an appetizer for next year's main course on Capitol Hill," wrote Brian Gardner, chief Washington policy strategist at Stifel, in a note.

• "Investors and managements should be prepared for a year that could lead to a few upset stomachs," he added.

By the numbers: Musk et al. spoke on the campaign trail of $2 trillion in spending cuts, more than the U.S. government spent on all discretionary spending last year ($1.7 trillion).

• It would be hard to get anywhere close to that without major cuts to programs beloved by Republican constituencies, such as defense, support for agriculture interests, and programs to support rural areas.
• It would also be a huge hit to aggregate demand — nearly 7% of projected 2025 GDP. It would be good for long-term fiscal sustainability but bad for near-term economic activity.

Flashback: The last time Trump was president, Congressional Republicans were in the driver's seat shaping tax legislation.

• Despite austere presidential budget requests, discretionary spending was about 13% higher in 2019 than in 2016.

The intrigue: Senators and representatives who were elected to public office and spent years climbing through the ranks may not take kindly to taking orders from private citizens who are new to the details.

• It is hard to know how Trump will react once specific spending cuts end up on the table — with associated political blowback.

The Federal Reserve cut its target interest rate by a quarter percentage point Wednesday, while releasing new projections that signal less rate-cutting is on the way in 2025 than envisioned three months ago.

Why it matters: The Fed is entering a more cautious phase after cutting rates for three straight meetings, reflecting sluggish progress in bringing inflation down.

Driving the news: The policy-setting Federal Open Market Committee reduced the target range for the federal funds rate to between 4.25% and 4.5%, which makes for a full percentage point reduction in the target since rate cuts began in September.

• However, in September, the median top Fed official projected it would be appropriate to cut rates to 3.4% by the end of 2025. Now, that median projection is 3.9%.
• That implies only two rate cuts ahead next year, not the four signaled by previous projections. Fourteen of 19 top Fed leaders believe two or fewer rate cuts are likely to be justified in 2025.

What they're saying: "Today was a closer call, but we decided it was the right call," Fed chair Jerome Powell told reporters at a press conference on Wednesday, referring to the decision to cut rates.

• "We are at or near a point at which it will be appropriate to slow the pace of further adjustments," Powell added.

The intrigue: The S&P 500 fell as much as 2% during Powell's press conference. The yield on the 10-year Treasury note jumped to just over 4.5%, the highest level in more than six months.

Between the lines: Powell said that there is more uncertainty around inflation than previously believed. "It's kind of common sense thinking that when the path is uncertain, you go a little bit slower," he said.

• "It's not unlike driving on a foggy night or walking into a dark room full of furniture, you just slow down."

By the numbers: Fed officials bumped up their projections for GDP and inflation, reflecting the evolution of economic data since September.

• The median official now expects 2.5% growth for 2024, up from 2% in September.
• But the officials now expect core inflation to be 2.8% for the year, higher than the 2.6% projected three months ago.
• The officials also increased their 2025 and 2026 inflation projections, now seeing 2.5% inflation next year (up from 2.1% in September).

What to watch: After pushing rates sharply higher in 2022 and 2023 to try to combat inflation, the Fed is now moving to adjust them to a more neutral stance, neither stimulating nor restraining the economy.

• The economy faces a complex set of tailwinds and headwinds next year. The incoming Trump administration promises deregulation, tax cuts, and a growth-friendly approach — but also tariffs and deportations that are outside the Fed's control.
• Powell said some Fed officials began to incorporate "highly conditional estimates" of the economic effects that might play out from Trump's policy in their forecasts.

Of note: Beth Hammack, who became president of the Cleveland Fed earlier this year, dissented from the decision, preferring not to cut rates at this meeting.

• In a recent speech, she favorably cited past times when the Fed has cut interest rates by three-quarters of a percentage point — as it did in the last two meetings — before then pausing to assess conditions.

Editor's Note: This story has been updated with market reactions to the Fed decision.

Social media posts don't carry the force of law, even when they're from a soon-to-be president. That is a reality to keep in mind in assessing how and when the incoming Trump administration will enact new tariffs.

Why it matters: Presidents have expansive power over trade policy — but that power is derived from specific legal provisions that dictate multistep processes for deploying that power.

• That means that businesses may not face the overnight imposition of large-scale tariffs but instead have time to prepare their supply chains, and the opportunity to seek exclusions for goods they have no choice but to import — at least, to the extent President-elect Trump follows his first-term trade playbook.

Flashback: In Trump's previous term, authority for tariffs came from Sections 201 and 301 of the Trade Act of 1974, allowing the president to target practices by trade partners that hurt U.S. businesses, and Section 232 of the Trade Expansion Act of 1962, on national security grounds.

• Each statute describes a process for how the authority can be invoked.

For example, Section 301, which both the Trump and Biden administrations have used to target Chinese goods, requires that the Office of the U.S. Trade Representative complete an investigation that includes consultation with the foreign government involved and allows U.S. interest groups to comment.

• This detailed report from the Congressional Research Service spells it out.
• Biden announced the expansion of Section 301 tariffs on China in May, and USTR received more than 1,100 public comments, leading to several changes.
• Some of the tariffs went into effect this past September, but some are not scheduled to take effect until 2026.

Of note: Jamieson Greer, a trade lawyer and Trump's nominee for U.S. trade representative, is well-versed in the importance of following the legal processes laid out by the relevant laws, as opposed to shooting from the hip.

• Over the summer, Greer spoke to JPMorgan clients about what to expect from a Trump 2.0 trade policy, and the bank's economics team released excerpts of his comments this month.
• Greer said that "the Trump administration was very good about having public hearings, taking on comments, letting people rebut comments and going through the required process."
• "Now we are in a situation where there are a lot of legal tools to allow the President to exercise a lot of authority over import regulation," he said, according to the research note. "We also have a lot of jurisprudence now very recently saying Trump was allowed to do what he did."

The incoming administration may want to move more quickly and explore options that involve more speed — but also more legal questions.

State of play: One approach, Cato Institute trade scholar Scott Lincicome tells Axios, would be to elect not to start a new Section 232 or 301 case, but to adjust rates on existing tariffs.

• "The current measures could be quickly 'modified' to change tariff rates or product coverage — and courts have signed off on that broadly," he says, such as by increasing tariffs on Chinese products already covered by Trump-Biden policies.
• Section 232 tariffs on steel could be modified to cover Mexican imports or expanded to other steel products, he adds.

Trump could also try to use laws with fewer procedural restrictions, particularly the International Emergency Economic Powers Act, which gives the president powers over commerce in times of national emergency.

• It grants the president power in response to an "unusual and extraordinary threat."

The bottom line: Corporate supply chain managers will have a busy next four years trying to adapt to higher trade barriers — but how quickly they will have to react depends on whether Trump turns to his first-term trade playbook or pushes boundaries further.

People's politics increasingly shape their views about the economy. If there was any doubt, the latest data from the University of Michigan consumer sentiment survey removed it.

Driving the news: Overall consumer sentiment ticked up to the highest level since April, with an index at 74, up from last month's 71.8. But that masks a stunning reversal in the partisan divide about the economy since Election Day.

• Sentiment among Democrats has fallen from 91.4 in October to 70.9 in the December readings.
• Sentiment among Republicans, conversely, has risen from 53.6 in October to 81.6 in December.

Of note: The swing was even more dramatic in terms of future expectations. Democrats' outlook plunged from 93.1 in October to 48.7 in the preliminary December survey.

• The only previous times in the Michigan data that Democrats have been that gloomy about the outlook were in the 2008 financial crisis and the early months of the pandemic.
• Republicans' expectations have soared, meanwhile, from 61.4 to 105.9. The last time Republicans were that optimistic was the last time President-elect Trump was in office, just before the pandemic hit, in early 2020.

What they're saying: "Democrats voiced concerns that anticipated policy changes, particularly tariff hikes, would lead to a resurgence in inflation," said survey director Joanne Hsu in a statement.

• "Republicans disagreed; they expect the next president will usher in an immense slowdown in inflation."

The bottom line: It's hard to know how to interpret survey results about economic conditions when they become, in effect, a proxy for political attitudes.

Hiring rebounded in November as the effects of hurricanes and a strike that held down October numbers dissipated. But beneath the surface of the new numbers are some warning signs that all may not be well for American workers.

Why it matters: Robust headline job growth isn't telling the whole story, as the number of people unemployed, and the share not in the labor force at all, both increased.

• Meanwhile, wage growth actually ticked up, which could make some Federal Reserve officials wary of moving too aggressively to cut rates.
• The report should not incite meaningful worries about the labor market, wrote Seema Shah, chief global strategist at Principal Asset Management — but "there are cracks in the labor market that require Fed attention."

By the numbers: There were 227,000 jobs added in November, a gain that reflects employers adding workers back to payrolls as hurricane and strike effects subsided. September and October payrolls were revised up by a combined 56,000 positions.

• Leisure and hospitality and transportation equipment were among the sectors with strong jobs growth after flat growth and job losses last month.
• Average hourly earnings rose by 0.4% in November and have risen at a 4.5% annual rate over the last three months — rather elevated for the Fed's comfort.

Yes, but: That data is from the survey of establishments. The takeaway from households — the other survey that comprises the jobs report — is less reassuring.

• The unemployment rate, while still historically low, increased to 4.2% after moving sideways in the prior two months. Unrounded, the jobless rate came in at 4.246%, only slightly below the most recent high seen in July (4.253%).
• Roughly 193,000 workers dropped out of the labor force last month. Contrary to the hiring boom signaled by the establishment survey, this data shows there were 355,000 fewer employed workers relative to October.

Of note: The share of 25- to 54-year-old Americans who were employed fell for the second straight month. As of November, it is 80.4%, down from 80.9% in September.

• After reaching multidecade highs over the summer, it is now below its pre-pandemic levels.

Between the lines: The report still offers a green light for the Fed to cut its target interest rate at a meeting concluding Dec. 18.

• "The argument for the Fed to act preemptively to prevent further economic deceleration strengthened today," Lazard chief market strategist Ron Temple wrote Friday morning.
• But the outlook for policy in 2025 remains murky, given both uneven progress on inflation, mixed signals in the labor market, and the prospect of big policy changes in the new administration.

Unprecedented pushback helped soften the tougher regulatory rules awaiting the nation's biggest banks. President-elect Trump's return to the White House might kill them altogether.

Why it matters: Corporate America anticipates Trump will usher in an era of light-touch regulation. A regulatory overhaul meant to safeguard the financial system is on hold indefinitely, if not outright dead.

What they're saying: "A lot of bankers are dancing in the street," JPMorgan CEO Jamie Dimon said at a conference days after the election.

• Citi CEO Jane Fraser told CNBC: "I would expect a lighter version of the Basel III proposal," referring to the set of plans that would, among other things, require banks to have more capital.

Catch up quick: Regulators say higher capital levels provide a larger cushion in an economic shock.

• The big banks say they have withstood recent crises and the increase would have undue harm on the economy (and industry profits).

Between the lines: Capital requirements for the largest banks are proposed to increase by 9%, lighter than the 19% increase Biden-era regulators first imagined.

• It was a big win for the industry's intense lobbying efforts, but executives are now questioning why capital requirements need to go up at all — and they see the possibility that incoming Trump appointees will agree with them.

The intrigue: Regulators agreed to pause work on major proposals, including Basel III, until Trump takes office.

• Michael Barr, the Fed's vice chair for supervision, has led the charge on finalizing Basel III, the international accord for global regulatory standards first developed in the years following the 2008 financial crisis.
• But Barr also needs sign-off from two other regulatory agencies: the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation — both of which will see new leadership installed by Trump.

"It will be up to the incoming administration to decide how to proceed," Rep. Patrick McHenry, R-N.C., chair of the financial services committee, said in a statement to Axios.

• "If they do move forward with implementing the Basel Committee's recommendations, I'm confident it will be based on sound, objective analysis supported by data — not driven by a progressive agenda," McHenry said.

What to watch: Any revisions are anticipated to dilute the proposal further, while finalizing the rules will be dragged out longer — risking a slow death of the rules put forward last summer.

• "In the current political context, it is unlikely any rules will be made more demanding," Nicolas Veron, a senior fellow at the Peterson Institute who has researched financial regulatory reform, tells Axios.
• Veron says that the U.S. is behind on Basel, even taking into account how long these processes can usually be, which has slowed implementation in other nations, too.

While Trump has moved quickly in naming nominees for cabinet positions, he has not yet tapped key figures for bank regulation.

• Embattled FDIC chair Martin Gruenberg will step down Jan. 19, giving Trump a clear lane to nominate a replacement.
• The comptroller of the currency position is technically vacant — Michael Hsu serves in the role in an acting capacity.

Yes, but: Things are a little more complicated for the third key bank regulator, the Fed vice chair for supervision. Barr's term extends until July 2026, and he said last month that he does not intend to vacate the position early.

• Some in Trump's orbit have floated the idea of demoting or firing Barr, which could lead to a disruptive legal battle. Fed chair Jerome Powell has been adamant that such a move would be against the law.
• Powell's term as chair also extends well into Trump's term, ending in May 2026. No Fed governor slots are scheduled to open up until January 2026, a year into Trump's term.

The bottom line: The proposal is "not dead, but it will be dormant for a while," Ian Katz, managing director of Capital Alpha, tells Axios in an email.

• "It's possible that we get a proposal sometime next year, and then a final rule more likely in 2026, Katz says. "But it's also possible that we don't get anything next year, and that this basically stalls out for 18-24 months."

President-elect Trump had a blunt warning Saturday to countries looking to shift away from the U.S. dollar as the dominant global currency — but his threats are in tension with his broader economic agenda.

Why it matters: The dollar's international role is one of several areas in which different aspects of Trump's agenda involve internal contradictions.

• Trump's planned use of tariffs to try to bolster U.S. manufacturing and reduce the trade deficit would likely lessen the global role of the dollar, not increase it.

Catch up quick: On Truth Social, Trump lobbed a message at the BRICS nations — Brazil, Russia, India, China and South Africa — that have sought an alternative to the dollar for use in trade and capital flows.

• "We require a commitment from these Countries that they will neither create a new BRICS Currency," Trump wrote, "nor back any other Currency to replace the mighty U.S. Dollar," and threatened to retaliate with a 100% tariff.

The big picture: When countries sell more goods and services in the United States than they buy, they are left with dollars that must be invested somewhere — and that somewhere includes U.S. Treasury bonds and other dollar assets.

• That, in turn, is part of the reason the dollar is the bedrock of the global financial system. The dollar's role as the global reserve currency has benefits for the U.S. — great geopolitical power and cheaper borrowing — but also costs.
• It means a persistently strong dollar that disadvantages U.S. exporters, a factor in the relatively small U.S. manufacturing sector.

What they're saying: Michael Pettis, an advocate of rebalancing global trade, wrote Sunday on Bluesky that "if the US really wants to reduce its trade deficits in order to revive domestic manufacturing and reduce the economy's reliance on household debt and fiscal deficits, by definition this means that foreigners will acquire fewer US assets."

• "The US cannot both reduce its trade deficit and increase the global dominance of [the U.S. dollar] because these impose diametrically opposed conditions," Pettis, a senior fellow at Carnegie China, wrote.

Flashback: At least one senior member of the incoming administration is well-versed in this trade-off.

• "Americans have enjoyed one of the greatest privileges of the international economy for the last nearly eight decades, a strong dollar that acts, of course, as the world reserve currency," Vice President-elect JD Vance said in a Senate Banking Committee hearing last year.
• "I think, in some ways you can argue that the reserve currency status is a massive subsidy to American consumers but a massive tax on American producers," he said.

The bottom line: You can ignore these tensions in a social media post, but once back in the White House, Trump will face the arithmetic of global trade and capital flows. The open question is how he resolves them.

The centerpiece of Treasury secretary nominee Scott Bessent's economic agenda is what he calls a "3/3/3" approach to policy: cutting the budget deficit to 3% of GDP, achieving 3% annual growth, and increasing domestic oil production by 3 million barrels per day.

Why it matters: If achieved, these goals would result in a more sustainable fiscal picture, paired with much faster growth than is projected under most mainstream forecasts. But they are in tension with other aspects of President-elect Trump's agenda.

• How those tensions are resolved — and particularly how Bessent's pro-market impulses fare in internal battles over tariffs, immigration and more — will shape the economy and fiscal picture for years to come.
• Stocks rose and bond yields plunged Monday morning as markets digested the Bessent appointment, judging that he would bring a counterweight to more populist forces in the administration.

State of play: The first leg of Bessent's 3/3/3 strategy is music to deficit hawks' ears. Deficits are currently on track to run in the 6% to 7% of GDP range for years to come, creating an upward spiral that risks much higher interest rates or challenges rolling over the national debt.

• The deficit doesn't need to be cut all the way to zero to be sustainable. Just getting the budget into "primary surplus," or into surplus excluding interest payments, would put the U.S. on much stronger fiscal footing.
• The intuition is that, even as the nation continues carrying the cost of debt service from decades of previously accumulated obligations, a primary surplus would mean the U.S. has stopped adding to the pile.
• A 3% overall deficit would imply a healthy primary surplus in the latter part of this decade — at least in the Congressional Budget Office's "baseline scenario," which assumes Trump's prior tax cuts are allowed to expire at the end of 2025.

Yes, but: Bessent will be a key voice in negotiations about extending those tax cuts, and it is uncertain the extent to which they will include offsetting spending cuts or tax increases that avoid blowing out the deficit further.

What they're saying: "He cares about deficits, he cares about economic growth and he recognizes that there is a huge connection between the two," Maya MacGuineas, president of the Committee for a Responsible Federal Budget, tells Axios.

• "His 3/3/3 framework is auspicious but would be a tremendous success if achieved," she said.
• "It will be important that tax cuts are offset and everything including entitlements are on the table to generate such large savings, but higher growth and lower deficits would be a tremendous accomplishment."

The second leg of Bessent's 3/3/3 strategy calls for growth well above what most long-term projections view as likely for the U.S. economy — but not implausibly so.

The big picture: The United States has achieved growth in the 3% ballpark for long stretches of its history. But that goal is in tension with Trump's restrictionist immigration policy.

• A 3% growth rate has been largely achieved the last couple of years, including a 3.2% year-over-year GDP gain in the fourth quarter of 2023. That was partly fueled by a surge in immigration that resulted in more workers — a surge Trump pledges to reverse.

Between the lines: There are, in an arithmetic sense, only two ways for economic output to grow. Either people put in more work hours, or employers find ways to achieve more economic output for every hour worked.

• For 2025, for example, the CBO projects that the potential labor force will rise by 1.2%, while potential labor productivity will rise by 1%, for a combined 2.2% total growth in potential GDP.
• Bessent and other Trump allies argue that the incoming administration's deregulatory zeal and capital-friendly tax policies will unleash businesses to become more productive.
• The AI revolution may also start to pay meaningful productivity dividends in the coming years.

Reality check: If the incoming administration enacts large-scale deportations of undocumented workers and tightens the screws on new entrants to the U.S., it would mean less labor supply, which would make achieving ambitious goals for overall GDP growth harder.

• The gap could be closed some if the nation achieved higher labor force participation among native-born Americans, particularly working-age men who have slipped out of the workforce over recent decades.

The bottom line: The country would be richer if Bessent's 3/3/3 goals are met, but that may prove easier said than done.

• We'll leave the third 3 (more oil production) for others to consider, but it's worth noting that daily U.S. production is already around 13 million barrels, there's a glut in the market, and energy executives question both the geological plausibility and financial wisdom of dramatic further expansion.

President-elect Trump will nominate Scott Bessent, a financier focused on global macroeconomics, as his Treasury secretary, which would make him the incoming administration's top economic official.

Why it matters: Bessent would bring to Treasury deep knowledge of bond and currency markets and a close relationship with Trump — as well as a surprising connection to hedge fund manager George Soros, mega-donor to liberal causes and bogeyman to the political right.

Zoom in: Bessent, 62, founded hedge fund Key Square Capital Management. Before that, he spent most of his career at Soros Capital Management, including as chief investment officer from 2011 to 2015.

• Bessent has been an avid fundraiser for Trump and a defender of the president-elect in media appearances.
• Trump has threatened to impose high tariffs on all U.S. imports. Some economists have warned that such aggressive tariffs could reignite inflation.

In recent interviews, Bessent has tried to play down Trump's trade threats.

• "The idea that he would recreate an affordability crisis is absurd," Bessent told Axios' Mike Allen in a phone interview this earlier this month.
• Bessent told Axios that Trump "regards himself as the mayor of 330 million Americans, and he wants them to do great, and have a great four years."
• He also told the Financial Times last month that the tariffs were a starting point for negotiations with trading partners.
• "My general view is that at the end of the day, he's a free trader," Bessent told the FT.

The intrigue: Bessent has been critical of the Federal Reserve and will likely be a key voice as Trump selects his appointees to run the central bank.

• Last month, he put forth a novel and unorthodox idea to name a "shadow Fed chair" who would be heir apparent to Jerome Powell when Powell's term is up in 2026. The idea was criticized for the potential impact on financial markets.
• Bessent has since backtracked on this idea. Speaking on CNBC earlier this month in the aftermath of the election, he clarified that he thinks the incoming Trump administration "should nominate the next Federal Reserve chair early."
• Powell, for his part, says he won't resign and that Trump can't demote Fed officials either.

What to watch: Bessent would be a key salesman for Trump's fiscal agenda on Capitol Hill at a pivotal time. A slew of Trump-era tax cuts will expire next year, even as Trump pledged a range of further tax cuts on the campaign trail.

• Bessent would also take charge of economic relations between the U.S. and the rest of the world.
• His would-be predecessor, Janet Yellen, imposed sanctions on Russia aimed at curbing the war in Ukraine.
• U.S.-China relations remain frosty, though Yellen established a so-called "Financial Working Group" with China — opening up channels between the two sides in the event of global market stress.
• The relationship between Bessent and Commerce secretary nominee Howard Lutnick will also be an open question - they have differing views on tariffs and were late rivals for the Treasury post.

Bessent is married to John Freeman, a former prosecutor, and they have two children. If confirmed, Bessent would be the first openly gay Treasury secretary. They live primarily in Charleston, S.C., and preserve historic mansions, per the Wall Street Journal.

Go deeper: Axios interview: Treasury frontrunner Scott Bessent, Wall Street's "quiet killer"

The incoming administration will face stark fiscal arithmetic: Most federal dollars go to direct transfers to Americans, disproportionately located in the very places that propelled President-elect Trump back to the White House.

Why it matters: If the Elon Musk/Vivek Ramaswany-led Department of Government Efficiency is to achieve anything approaching the $2 trillion in annual cost savings they've floated, slashing bureaucrats from the federal payroll or payments to well-heeled contractors wouldn't be enough.

• Rather, it would require cuts to programs on which the counties that backed Trump heavily depend.
• Big-ticket transfer programs operated by the federal government include Social Security ($1.3 trillion in outlays in 2023), Medicare ($1 trillion), Medicaid ($616 billion), income security programs like unemployment benefits and food stamps ($448 billion), and federal employee pensions ($197 billion).
• Mandatory programs like those added up to 69% of non-interest federal spending in 2023. Their combined $3.75 trillion in spending was more than twice as much as defense and non-defense discretionary spending combined ($1.7 trillion).

By the numbers: Researchers at the Economic Innovation Group analyzed county-level data on how much personal income was driven by those federal transfer programs in 2022, as opposed to income earned from wages, investments, and the like.

• In the counties most reliant on transfer payments — where they account for more than 25% of all income — Trump won 63% of the vote.
• In those counties least reliant on transfers, accounting for 15% or less of total income, Vice President Harris won 56% of the vote, according to analysis by Sarah Eckhardt, Connor O'Brien and Ben Glasner of EIG.

Zoom in: There are multiple types of counties with high rates of transfer payments. Some, for example, are prosperous places that are popular among retirees receiving Social Security and Medicare.

• Others are more economically distressed, resulting in a greater reliance on Medicaid and income support benefits. In some of these communities, federal transfers account for a massive share of all income.
• Owsley County in Kentucky led the nation with 63% of personal income from transfer payments, and it topped 50% in 13 other Kentucky counties. Trump carried the state by almost 31 points.

Of note: The administrative cost of these programs tends to be a small fraction of the money spent; the overwhelming cost is the benefits themselves. For Social Security, for example, administrative overhead is about 0.5% of total spending.

• That added up to $7.2 billion in 2023 — meaning even if you replaced federal employees with AI customer service bots, the savings would be trivial in the scheme of the whole federal budget.

The bottom line: "The primary drivers of greater transfer spending are an aging society and rising healthcare costs, not wasteful programs or a radically more generous welfare state," EIG president John Lettieri tells Axios.

• "Therefore, if we want to reverse this trend, we need the nation as a whole to look more like the places that are relatively less dependent on transfers today — areas with strong population and economic growth alike." 

A new message is emerging from top Fed officials: With an economy this strong, why rush to cut interest rates?

Why it matters: The Fed sees a fundamentally sound economy, with few (if any) conditions warranting aggressive rate cuts.

• That, in the emerging Fed consensus, means it makes sense to move slowly in assessing how much to support the economy — especially with the uncertainty tied to the incoming administration's economic policies.

What they're saying: "The recent performance of our economy has been remarkably good, by far the best of any major economy in the world," Federal Reserve chair Jerome Powell said in a speech Thursday in Dallas.

• "The economy is not sending any signals that we need to be in a hurry to lower rates," he added.

Driving the news: New consumer spending data supports Powell's message. Retail sales increased 0.4% in October, the Commerce Department said Friday, with strong spending at auto shops, electronics stores and restaurants.

• Revisions to September data showed retail sales rose 0.8% — twice as much as initially estimated.
• The retail sales "control group," which excludes volatile categories like auto sales and feeds into the calculation of GDP, fell 0.1% in October. But the previous month got even better: revised up to 1.2% from 0.7%.
• Separately, industrial production fell 0.3% in October, the Fed said Friday morning, reflecting in part the impact of the Boeing strike.

The big picture: There's been a shift in the narrative about the consumer in recent weeks, in large part because of revisions to previous years' data that showed stronger growth in incomes and spending.

• For instance, the revised data showed the personal saving rate — how much consumers have left over after spending — was 5.2% in the second quarter, nearly 2 full percentage points higher than initially thought.
• "Growth in consumer spending has remained strong, supported by increases in disposable income and solid household balance sheets," Powell said Thursday.

Between the lines: In recent weeks, Powell has said lowering interest rates was a "recalibration" of monetary policy set when the Fed was in inflation-fighting mode.

• "The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully," Powell said in Thursday's speech.

Zoom in: Between Powell's hawkish tone and Friday morning's strong retail sales numbers, markets are getting the message.

• The market-priced odds of a rate cut next month have fallen from 72% Thursday to 62% as of 11am ET Friday, per the CME FedWatch tool.

The Fed wants to move rates to a neutral setting, one that neither boosts the economy nor restrains it. But no one knows where that level is — an idea that further clouds the path of rate cuts.

• In other words, there is uncertainty around both where policy is headed and how fast it should try to get there.

State of play: In a speech earlier this week, Dallas Fed president Lorie Logan suggested the Fed may be closer to this "neutral" level than many think.

• "I see substantial signs that the neutral rate has increased in recent years, and some hints that it could be very close to where the fed funds rate is now," Logan said.

In an interview Wednesday, Minneapolis Fed president Neel Kashkari made a similar case. "It's really uncertain, in my mind, where we're going to end up landing," Kashkari told Axios reporters and editors.

• "How do I reconcile a five-plus percent federal funds rate for a year with a labor market that has stayed resilient, while GDP has been strong? Consumer spending that has been strong?"
• "The only way I can reconcile that in my head is that at least temporarily, the neutral rate has been elevated. And so while I thought we were putting two feet on the brakes, maybe we were only putting one foot on the brakes of the economy."

The bottom line: The summer growth scare is over, and the economy looks solid. Nobody is exactly sure how the new Trump administration's policies will affect the economy. Against that backdrop, the Fed will be moving gingerly.