With the Federal Reserve preparing for another decision on interest rates, concerns about inflation are front and center amid warnings from close advisors to President-elect Donald Trump. Despite recent drops in prices, many believe inflation risks remain significant, complicati ng the Fed's balancing act of stimulating growth without triggering runaway inflation.
This week, the Federal Reserve is expected to announce its latest interest rate cut of up to 0.25 percentage points, bringing the benchmark rate down to approximately 4.3%, just below the peak it hit at 4.3% earlier this year.
"Powell had bette r be careful with these rate cuts," cautioned one advisor, stating, "Bidenflation may not be dead," expressing concerns about underlying strength within the economy and persistent inflationary pressures.
Recent reports indicated core services inflation, which excludes shelter, nudged upwards to 4.2% as of November. This troubling figure indicates inflation isn't as dormant as it might seem at first glance, especially when combined with sustained economic expansion, which saw annualized growth rates of 2.8% and 3.0% for the second and third quarters this year, respectively. The Atlanta Fed’s GDPNow model anticipates growth at 3.3% for the fourth quarter, reflecting a persistent economic strength.
Labor market dynamics add another layer of complexity for the Fed's monetary policy decisions, with unemployment rising slightly to 4.2% but remaining below many economists' estimates of the non-accelerated inflation rate of unemployment (NAIRU). This situation indicates a labor market still putting upward pressure on wages, which increased by 3.9% in the latest Employment Cost Index measurements.
Traditionally, sustained wage increases could lead to broader price hikes, heightening concerns within Trump's economic advisory team. They assert the Fed's previous acknowledgment of labor market weakness may now appear misguided. Indeed, wage growth, currently hovering above 4%, could stoke inflation fears.
The timing of the Fed's policy decisions is also significant, with recent rate cuts totaling 75 basis points since September. Advisors remind caution, noting the full effects of these cuts might not manifest until 2026. "There’s too much at stake to move blindly," commented one advisor, indicating the risks of cutting rates too aggressively.
Former Fed Chair Jerome Powell is expected to walk a tightrope at the Fed's meeting, facing scrutiny not only from the Trump administration but also from hawkish government officials concerned about the risks of overly accommodative monetary policy. While he has identified necessary balance, potential changes to U.S. economic and taxation policies under Trump could reverberate, adding to inflationary pressures.
"We’re mindful of the risk we go too far, too fast, and also of the risk we don’t go far enough," Powell stated recently as the Fed prepares to issue its quarterly economic projections. This meeting is anticipated to provide some indication of the Fed's intentions moving forward, especially as concerns escalate about fiscal policy changes and their potential impact on inflation.
Against this backdrop, the central bank's latest announcement could signal not just rate cuts but also caution about future adjustments. Policymakers are likely to indicate slower cuts next year compared to previous months, with both the immediate easing momentum and overall economic growth being much stronger than analysts anticipated only months ago. "Growth is definitely stronger than we thought," Powell remarked.
Financial experts forecast the Fed might limit its rate cuts next year to just two or three, veering away from the four cuts previously discussed. Lingering uncertainties surrounding inflation and persistent job market strength create uneventful conditions for aggressive monetary easing. Some analysts claim price pressures remain significantly above the Fed's desired 2% target, making drastic cuts less likely.
Wall Street sentiment echoes this caution, with futures prices indicating only two cuts expected over the year, highlighting the fact borrowers may remain subject to borrowing costs significantly higher than pre-inflation levels. Presently, inflation, aside from volatile food and energy costs, remains stagnant at around 2.8%, presenting complications for immediate interest rate relief.
While the Fed prepares to make its decision, discussions around integrated future fiscal policy under Trump pose compelling questions about how the administration's proposed reforms could influence inflation. The proposal for increased tariffs alongside muted immigration policies are also viewed through the lens of inflation concerns, raising the likelihood of sustained price increases.
Tara Sinclair, former Treasury Department official, emphasized the potential complications of waiting for the effects of Trump's policies to take shape. "It seems easier to explain not cutting than to risk having to raise rates later on," she posited, underscoring the uncertainty funneled through the central bank's decision-making process.
Throughout this financial climate characterized by cautious optimism paired with undefined future parameters, Powell’s path forward will determine how policies impact not only inflation but also the economic growth prospects as the nation heads toward another politically charged year.
