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.