As the New Year approaches, Powell finds himself in a dilemma on how to address the inflationary pressures potentially brought by Trump's policies without openly opposing 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 Trump administration's impact on the US economy and inflation.

He attempts to avoid conflicts with Donald Trump, although some of his colleagues express concern that the president-elect's policies may reignite inflationary pressures.

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

The latest economic forecasts from the Federal Reserve show that officials expect inflationary pressures next year to be more persistent than previously anticipated. Most Federal Reserve officials expect only two interest rate cuts next year and two more in 2026, which is fewer than the at least four cuts anticipated in September.

They now expect the core inflation rate (excluding food and Energy) next year to decrease to 2.5%, which is higher than the previously estimated 2.2%. Moreover, out of 19 officials, 15 believe that inflation may exceed expectations, a significant increase from just 3 in September.

Powell has been cautious in avoiding a direct link between the Federal Reserve's policies and Trump's proposals. At the news conference on November 7, just days after Trump's election victory, he clearly stated that the Federal Reserve would not set interest rate policies based on speculation about the new government's policies.

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

Trump threatens to raise or impose new tariffs on trade partners and tighten immigration rules, which could drive up prices and wages in the short term. However, Trump’s advisors state that deregulation and measures to increase Energy production might offset the impact of rising Commodity prices, allowing inflation to continue to decline.

Scott Bessent, the nominee for US Treasury Secretary, downplayed the impact of the tariffs proposed by Trump on inflation, believing that tariffs would not lead to sustained price increases by businesses.

He stated on a radio show hosted by Trump’s former advisor Larry Kudlow that:

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

Will Powell compromise this time?

Powell stated at a press conference last week that some Federal Reserve officials considered potential policy changes in their latest forecasts, while others did not. Powell denied that the November elections were the main reason for the officials' more pessimistic inflation outlook, instead pointing out that recent inflation data has been more robust.

Timiraos wrote that Powell has privately urged colleagues to be cautious in their public statements and not to directly link possible policy changes from the White House with the Fed’s response, to avoid giving Republicans the impression that the Federal Reserve is trying to offset 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 subject to political attention during election campaigns or when new governments undertake transformative policy reforms. The potential impacts of policy reforms that the new government may implement are also still highly uncertain.

In 2018, when Trump first pushed for an escalation in trade conflicts, the Federal Reserve lowered interest rates under presidential pressure. However, Timiraos believes this time may be different since the fundamental conditions have changed. Inflation was low at that time, whereas the USA has just experienced years of high inflation.

JPMorgan's Chief US Economist Michael Feroli 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 effects of tariff increases and concluded that, as long as two conditions were met, the central bank could avoid lowering interest rates in the face of rising prices: the expectation of low inflation among households and businesses, and rapid transmission of price increases to the economy.

At the press conference on December 18, when asked about his views on the impacts of raising tariffs in the current environment, Powell referenced this brief from the podium.

Powell stated:

The committee is currently discussing paths and re-evaluating how tariffs affect inflation and the economy. When we finally see actual policies, this will enable us to assess what may be appropriate policy responses more cautiously and thoughtfully.

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