Investing.com — Federal Reserve Chairman Jerome Powell is navigating familiar territory as he heads into 2025, aiming to balance central bank independence while avoiding a clash with Donald Trump.
Powell’s challenge lies in managing monetary policy without appearing to preemptively counter potential inflationary pressures from the incoming administration’s policies.
Balancing has been evident in recent months. Shortly after Trump’s election victory in November, Powell stressed that the Fed would not speculate on how future policies might affect interest rates.
“We are not speculating, speculating or assuming,” Powell said on November 7. However, the Fed’s latest projections suggest some officials are already counting on policy changes, signaling fewer rate cuts in 2025 amid inflation concerns.
Last week, the Fed cut rates by a quarter point, completing a full percentage point cut since September. Despite this, updated forecasts revealed a more cautious stance on easing.
Most officials now forecast just two cuts next year, down from the four forecast in September. Inflation is expected to remain at 2.5% in 2025, compared to earlier forecasts of 2.2%. Namely, 15 out of 19 Fed officials see a risk that inflation could exceed projections.
Michael Gapen, chief American economist in Morgan Stanley (NYSE: ), has noticed a change. The last meeting “turned out to be a lot more hawkish than we thought because they did what they said they wouldn’t do: They said they wouldn’t speculate on policy, and then a month later they decided to speculate on policy,” he said.
A key factor behind this caution is Trump’s proposed economic agenda, which includes tariffs and stricter immigration policies. Tariffs could raise prices, while tighter border controls could limit labor supply, pushing up wages. Powell downplayed the direct impact of Trump’s election on inflation forecasts, attributing the change to recent inflation data instead.
Despite this, Powell privately advised colleagues to be cautious in public statements to avoid the perception of political bias, according to the Wall Street Journal. This approach is consistent with Powell’s efforts to maintain the Fed’s reputation for apolitical, data-driven decision-making.
The stakes are high. Powell recalls the Fed’s experience during Trump’s first term when trade wars led to rate cuts. However, the current environment is different. Inflation is elevated, in contrast to the backdrop of low inflation in 2018. Powell highlighted this difference at his Dec. 18 press conference, citing past Fed internal analyses.
“What the committee is doing now is discussing pathways and re-understanding how tariffs can affect inflation and the economy,” Powell said. “It puts us in a position, when we finally see what the actual policies are, to make a more careful, careful assessment of what the appropriate policy response might be.”
Trump’s advisers argue that deregulation and increased energy production could mitigate inflationary risks. New Finance Minister Scott Bessent downplayed the concerns.
“Tariffs can’t be inflationary because if the price of one thing goes up, unless you give people more money, then they have less money to spend on something else, so there’s no inflation,” he said on a radio show hosted by Larry Kudlow, former Trump’s adviser.
Still, analysts believe the Fed will react cautiously if supply-side improvements reverse.
“In this environment, you don’t come in after six years of below-target inflation. You’re coming in after being well above target for several years,” notes JPMorgan Chief Economist Michael Feroli.
Other analysts suggest that the economic environment will significantly affect how much companies pass on rising costs to consumers.
Economist Ray Farris believes that with full employment, cost increases are more likely to be passed on than during a downturn. It also highlights uncertainty about how quickly companies adjust prices, explaining that a gradual increase could make inflation appear more stable to the public.
