Investors aren’t expecting many surprises at the end of the Federal Reserve’s Wednesday policy meeting, where central bank officials are widely expected to hold interest rates steady following three consecutive cuts at the end of 2024.
There is considerably more uncertainty surrounding how Fed Chair Jerome Powell will use his afternoon press conference to address the new elephant in the room: the effect that Donald Trump could have on the future path of monetary policy.
The US president is threatening to impose tariffs on Mexico, Canada and China as early as this Saturday, a stance that some economists predict will put upward pressure on inflation at a time when the central bank is trying to ensure that issue is finally under control.
What makes things more complicated is that Trump is making it clear he wants policy makers to cut rates further. He hinted last week at a coming clash with Powell on that subject, saying he wants rates to come down “a lot,” and that he expects to talk directly with the Fed chair “at the right time.”
JPMorgan chief economist Michael Feroli expects Powell today will adopt a “duck and cover” approach at his press conference following the Fed meeting.
Feroli says he expects Powell will indicate that each Fed member is using his or her own conditioning assumptions on what trade policies are ultimately adopted, while making it clear that the “the only thing decided at the meeting was the monetary policy statement” released by the Fed’s rate-setting committee.
In December, officials changed language in their policy statement to say that the Fed would consider “the extent and timing” of additional adjustments to rates based on the data and changing outlook — showing a less committed form than earlier in their 2024 rate-cutting campaign.
At that December meeting almost all Federal Reserve officials agreed that “upside risks to the inflation outlook had increased” due in part to the “likely effects” of expected changes in trade and immigration policies, according to minutes from that meeting. Some officials had begun working those assumptions into their outlook for policy.
In recent weeks many Fed officials made clear they are increasingly concerned about signs of persistent inflation, citing that as a reason to move cautiously in 2025. In December they predicted just two rate cuts for all of 2025, down from a prior estimate of four.
The latest reading on inflation for the month of December as measured by the Consumer Price Index (CPI) showed slight progress after three months of holding steady.
On a “core” basis, which eliminates the more volatile costs of food and gas, CPI climbed 0.2% over the prior month, a deceleration from November’s 0.3% monthly gain.
On an annual basis prices rose 3.2%, dropping slightly after three months of being stuck at 3.3%.
The next reading of the Fed’s preferred inflation gauge — the Personal Consumption Expenditures (PCE) index — is out Friday.
Economists expect annual “core” PCE to have clocked in at 2.8% in December, unchanged from November. Over the prior month, economists project “core” PCE rose 0.2%, faster than the 0.1% seen in November.
Some watchers of the US economy are now raising the possibility that the Fed could even be forced to raise rates this year — a move that would surely invite Trump’s wrath.
Harvard economist Ken Rogoff told Yahoo Finance he doesn’t think the Fed will fire off the two cuts predicted.
“I think the odds of a hike are the same as the odds of a cut,” he said, pointing to the potential for higher deficits and investments in AI driving the economy.
The Fed’s policy decision is due out at 2p ET followed by Fed Chair Powell’s press conference at 2:30p ET.
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Source: finance.yahoo.com