"New Federal Reserve News Agency": The Federal Reserve is trying to assess Trump's influence

As the New Year approaches, Powell finds himself in a dilemma, that is, how to address the inflationary pressures that may arise from Trump's policies without openly defying him.

On the 27th local time, Nick Timiraos, known as the "new Federal Reserve correspondent," published an article stating that the Federal Reserve is trying to reassess the impact of the new Trump administration on the U.S. economy and inflation.

He is trying to avoid conflict with Donald Trump, although some of his colleagues are concerned that the policies of the president-elect may reignite inflationary pressures.

With Trump's inauguration imminent, the Federal Reserve raises inflation expectations

The Federal Reserve's latest economic forecast shows that officials expect inflationary pressures next year to be more persistent than previously anticipated. Most Federal Reserve officials expect only two rate cuts next year, with two more in 2026, which is fewer than the at least four cuts anticipated in September.

Now, they expect the core inflation rate (excluding food and energy) to drop to 2.5% next year, up from the previously expected 2.2%. Additionally, 15 out of 19 officials believe inflation may be higher than expected, a significant increase from just three in September.

Powell has been cautious to avoid directly linking the Federal Reserve's policies to Trump's proposals. At a press conference on November 7, just days after Trump's victory, he made it clear that the Federal Reserve would not set interest rate policies based on speculation or conjecture about the new administration's policies.

However, the Federal Reserve often emphasizes that its interest rate policy needs to be "forward-looking," which means it must consider future price pressures and employment forecasts. This tendency for balance has been particularly evident over the past two months.

Trump has threatened to raise or impose new tariffs on trade partners and tighten immigration rules, which could push prices and wages higher in the short term. However, Trump's advisors have stated that deregulation and increased energy production measures could offset the impact of rising commodity prices, allowing inflation to continue to decline.

U.S. Treasury Secretary nominee Scott Bessent downplayed the impact of Trump's proposed tariffs on inflation, arguing that tariffs would not lead to sustained price increases by businesses.

He stated on a radio program hosted by Trump's former advisor Larry Kudlow:

Tariffs will not lead to inflation because if the price of one thing goes up, unless you give people more money, they will spend less on something else, so inflation will not occur.

Will Powell compromise this time?

Last week, Powell stated at a press conference that some Federal Reserve officials considered potential policy changes in the latest forecast, while others did not. Powell denied that the November election was the main reason for officials' more pessimistic inflation outlook, instead pointing to recent stronger inflation data.

Timiraos wrote that Powell privately urged his colleagues to be cautious in public statements and not to directly link possible policy changes from the White House to the Federal Reserve's response, to avoid giving Republicans the impression that the Federal Reserve is trying to counteract policies they dislike.

This aligns with his long-standing efforts to uphold the culture of the Federal Reserve, emphasizing non-political, calm analysis. Officials may find themselves under political scrutiny during election periods or when a new government implements transformative policy reforms. There is also significant uncertainty regarding the impact of policy reforms that the new government may adopt.

In 2018, when Trump first pushed for an escalation of trade conflicts, the Federal Reserve was pressured by the president to cut interest rates. However, Timiraos believes that this time the situation may be different, as the fundamental conditions have changed. Inflation was low at that time, whereas the U.S. has just endured several years of high inflation.

Michael Feroli, Chief U.S. Economist at JP Morgan, stated:

"In this environment, you are not starting from six years of inflation below target, but rather from several years of inflation above target."

In 2018, the Federal Reserve simulated the impact of tariff increases and concluded that as long as two conditions were met, the central bank could avoid cutting interest rates in the face of rising prices: households and businesses expected inflation to remain low, and price increases were rapidly transmitted to the economy.

At the press conference on December 18, when asked about the impact of raising tariffs in the current environment, Powell referenced this briefing from the podium.

Powell stated:

The committee is currently discussing the path and re-evaluating how tariffs affect inflation and the economy. When we ultimately see actual policies, it will allow us to assess more cautiously and thoughtfully what might be appropriate policy responses