According to financial news agency on December 27 (Editor: Shi Zhengcheng), for the 71-year-old Fed Chairman Powell, the currently tranquil work environment will soon be a thing of the past in just three weeks and three days.

In the view of renowned macro reporter and so-called "Fed mouthpiece" Nick Timiraos, Powell has stepped onto a familiar tightrope—emphasizing the Fed's policy independence while constantly assessing how Trump's words and actions influence monetary policy.

The "stubborn" Fed.

At the press conference on November 7, faced with the news of Trump's "great victory," Powell maintained a stern expression while repeatedly emphasizing that the Fed would not base its policies on guesses about the future government, especially concerning trade and immigration policies closely related to inflation.

The Fed chairman, clearly well-prepared for such questions, emphasized: "We do not guess, do not speculate, and will not hypothesize."

Timiraus pointed out that during the policy meeting in December, however, Federal Reserve officials actively lowered their expectations for interest rate cuts next year, partly because they believe that price pressures will be more persistent next year. Excluding the volatile food and Energy items, the Federal Reserve expects the inflation rate to fall to 2.5% in 2025, compared to a previous expectation of 2.2%.

Meanwhile, among the 19 members, 15 indicated that the risks of inflation exceeding expectations are increasing. In September, only 3 expressed similar concerns. Therefore, the majority of officials expect only two interest rate cuts in 2025, followed by another two cuts in 2026. The previous expectation was for four cuts next year.

So the source of this "risk" is self-evident.

Michael Gapin, chief economist at Morgan Stanley, interpreted that the December interest rate meeting was more hawkish than we imagined because they did something they clearly stated they would not do - the Federal Reserve decided to speculate on the policies of the USA government.

Gapin pointed out that economic forecasts make it "hard to avoid the elephant in the room"; Powell does not want to say this, but it is clearly a signal sent by the committee... they are saying we must initiate part of the response.

For Federal Reserve expectations, Trump's biggest "threat" lies in imposing tariffs and tightening immigration rules, which could drive up prices and wages in the short term.

At the same time, Trump's economic advisors indicated that deregulation and promoting Energy production could offset the impact of rising prices, thereby maintaining a continued decline in inflation.

Scott Bessenet, who was nominated for Treasury Secretary, argued last month that "tariffs will not be an inflationary factor because, assuming the price of a certain Commodity rises, unless people receive more money, their spending on other Commodities will decrease."

One possible message that may relieve Powell is that although Trump has long expressed a desire for low interest rates, he has recently commented little on the Fed's actions, and his economic advisors are not in a rush to see the Fed continue to cut rates because they know the inflation issue has not yet been fully resolved.

There are rifts within the Federal Reserve.

At last week's press conference, Powell stated that some officials took potential policy changes into account when submitting new forecasts, while others did not. He also "stubbornly" indicated that the reason officials may be more disappointed with inflation expectations for next year could be due not to election results but to current inflation forecasts.

Timiraos disclosed that privately Powell is unhappy with some colleagues' public statements, as they have more directly associated Fed policy with the policy changes suggested by Trump. Powell does not want Republicans to feel that the Fed is trying to offset policies they dislike.

Similarly, Powell has also urged his colleagues to "exercise caution" in their public remarks.

In contrast to Powell's insistence on an image of "independence" and "calm analysis", the shifts of other Federal Reserve officials have been quite dramatic. For example, Federal Reserve Governor Cook, who supported a 50 basis point cut in September, has recently hinted that if labor growth slows or stops, the Fed is unlikely to cut rates.

Looking back at the 2018 script.

During Trump's first term, while initiating a trade war, there were also conflicts with the Federal Reserve over rate cuts. Ultimately, the Fed relented and cut rates, but the core reason was the concern that the trade war would undermine business confidence and investment, eclipsing price increases brought about by tariffs.

It is unclear whether the Federal Reserve will respond similarly next year, as the economic situation today is very different.

Timiraos introduced that in 2018, the Federal Reserve's staff simulated the impact of the trade war, concluding that the central bank could "ignore" or keep the interest rate policy unchanged as long as two conditions were met: the inflation expectations of households and businesses remained low, while price increases rapidly transmitted to the economy.

Powell also mentioned this briefing last week and emphasized that "the committee is currently discussing the policy path and trying to understand again how tariffs affect inflation and the economy."

Meanwhile, Trump has also promised to strengthen border controls and to carry out mass deportations of illegal immigrants. This could mean less production and demand, as well as higher wages, but all of this is difficult to model.

Economists also believe that if Trump's new administration pushes policies that reverse supply improvements, the Federal Reserve would simply keep interest rates unchanged.

Michael Feroli, chief U.S. economist at JPMorgan, believes: "In this environment, you are not experiencing six years of low inflation, but have just gone through several years of inflation far above target."

Meanwhile, how companies pass on price increases to consumers is also important.

Economist Ray Fairiss interprets that the USA is in a state of full employment, and if cost shocks occur, the impact will be more pronounced than during economic downturns. Additionally, the way price increases are transmitted is also significant; if companies gradually pass on price hikes rather than doing so immediately and completely, the public will have a perception that inflation is becoming increasingly severe.

Editor/Jeffy