In the summer of 2024, the Fed was preparing to make a series of interest rate cuts totaling 1.5% by the end of the year. Was it to help the Democrats defeat Donald Trump?
Ostensibly, the Fed does not involve itself in politics. But it's hard to deny that Federal Reserve Chairman Jerome Powell was putting his thumb on the scale to help Kamala Harris in her bid for the presidency. Despite clear signs that inflation had not been tamed, Powell prematurely lowered interest rates by a combined percentage point in September and November.
The result was inflation edging up to 2.9% in December and 3% in January 2025. Now Powell is forced to announce that there will be no more interest rate cuts for the foreseeable future, perhaps even no more this year.
The stock market dropped 198 points, losing 0.5% of its value on that news.
“The hotter than expected CPI confirms investors’ anxiety regarding too-hot inflation that will keep the Fed on the sidelines (as opposed to cutting rates),” Sameer Samana, Wells Fargo Investment Institute head of global equities and real assets, said. “While risk markets can go higher, it will be a choppier trajectory than the last two years.”
“Core” C.P.I., which more closely reflects underlying inflation by removing volatile food and energy prices, also showed little improvement. It rose 0.4 percent from December or 3.3 percent on a year-over-year basis, both higher than economists expected. The monthly increase in core prices was the highest since April 2023.
The January data underscored the uneven nature of the central bank’s battle against high prices. Inflation has subsided drastically since cresting just above 9 percent in 2022, but progress in recent months has been much more sporadic.
The Federal Reserve Bank of Chicago Chairman, Austan Goolsbee, called the latest inflation report “sobering.”
“There’s no question, if we got multiple months like this, then the job is clearly not done,” he said in an interview.
Jonathan Wright, a former Fed economist now a professor at Johns Hopkins University, said a rate increase from the central bank is “at least as likely” as a rate cut in the near term.
That could really put a damper on Trump's economy.
Price pressures are persisting at a time of significant uncertainty about the outlook for the economy just weeks into President Trump’s second term in the White House. Tariffs, deportations, tax cuts and deregulation are expected to have an economic impact, but the final policy mix will determine whether economists and policymakers will pay more mind to the risk of resurgent inflation or an unexpected slowdown in growth.
“The risks are to higher inflation and lower growth,” said Alan Detmeister, a former Fed economist now at UBS, of Trump’s proposals. Trump is hoping the Fed will cut rates a little more to give consumers some confidence in major purchases.
“BIDEN INFLATION UP!" Trump wrote on Truth Social. He called for lower interest rates as “something which would go hand in hand with upcoming Tariffs!!!"
But the Fed has signaled little urgency to lower rates for the time being, setting up a potential clash with a president who showed in his first term a readiness to critique the central bank when it resisted his demands for cuts. After a percentage point worth of cuts in the final three months of last year, rates now hover between 4.25 percent and 4.5 percent.
Most economists seem content with interest rates staying where they are for the time being. As long as inflation doesn't get any higher, that's probably what will happen.
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