No Surprises in Fed’s Decision

• The Federal Reserve is widely expected to hold interest rates steady after three consecutive cuts at the end of 2024.
• Markets are more focused on Fed Chair Jerome Powell’s press conference and how he addresses growing political pressure.

Trump’s Influence on Monetary Policy

• Trump has signaled he wants further rate cuts, stating he expects to talk directly with Powell “at the right time.”
• His proposed tariffs on Mexico, Canada, and China could fuel inflation, complicating the Fed’s rate strategy.

Rising Inflation Concerns

• December’s Consumer Price Index (CPI) showed only slight progress, with core inflation at 3.2% annually, down just 0.1% from prior months.
• The Fed’s preferred PCE inflation gauge, due Friday, is expected to remain at 2.8%, reinforcing concerns about persistent inflation.

Fed’s Uncertain Path for 2025

• Officials originally predicted two rate cuts this year, but with inflation risks mounting, some now warn that rate hikes might be on the table instead.
• Harvard economist Ken Rogoff argues the odds of a hike are now equal to the odds of a cut, driven by deficits and AI-driven investments.

Market Awaits Powell’s Response

• JPMorgan’s Michael Feroli expects Powell to take a “duck and cover” approach, avoiding direct confrontation with Trump’s demands.
• Powell is likely to emphasize that the Fed remains data-dependent and won’t be swayed by political pressure.

What’s Next?

• The Fed’s current stance seems justified given the mixed economic data. However, if inflationary pressures persist due to external factors like tariffs and fiscal policies, the central bank may have to reconsider its rate path.
• Powell’s ability to navigate political pressures while maintaining credibility will be a key test for Fed independence in 2025.