But Fed Chairman Jerome Powell has indicated the bar would be higher for a further cut in January. They meet on Tuesdays and Wednesdays.“The fact that growth is strong, unemployment is low, stock markets are near record highs and inflation is above target all argue for a pause,” ING analysts said.
Powell’s robust defense of the Fed’s independence in response to Trump’s continued pressure to cut rates confirms this, ING said.
On January 11, Powell released a rare, solemn statement revealing that he was being investigated by the Justice Department over a $2.5 billion renovation of the bank’s headquarters.
He decried the threat of criminal prosecution as a result of policymakers setting interest rates in the public’s interest — rather than bowing to the president’s wishes. Trump has made no secret of his disdain for Powell, claiming there is “no inflation” and repeatedly questioning the Fed chairman’s competence and integrity.
Yet U.S. inflation has been well above the bank’s two percent target for more than five years, according to former Cleveland Fed President Loretta Mester.
“I think the Fed has to keep a pretty close eye on where inflation is going,” she told AFP.
Price increases could cool after Trump’s trade tariffs trickle down to the world’s largest economy, but Mester stressed the need for “more compelling evidence.”
Meanwhile, existing cost increases have created a “big wedge” between how affluent and lower-income households view the economy, said Diane Swonk, chief economist at KPMG.
Even if the gap could temporarily narrow when fiscal stimulus hits in early 2026 – with a rise in tax refunds due to extensions of tax cuts – it could “trigger a more deep-seated bout of inflation,” she warned.
Another complication is stagnant employment, forcing policymakers to walk a tightrope between lowering interest rates to stimulate the economy and keeping them higher to curb inflation.
External pressure
The Fed meets eight times a year to discuss interest rate levels, and Michael Pearce of Oxford Economics said the dilemma it faces has been eased.
Figures suggest that risks to the labor market appear less pressing than a few months ago, while the likelihood of rising inflation also appears to have diminished, he said in a note.
Nevertheless, events outside the rate-setting committee “have the potential to upend the path of monetary policy,” Pearce added.
In addition to the Powell investigation, Trump has also tried to fire Fed Governor Lisa Cook, fueling a legal battle that is crucial in shaping the discretion the president has in changing the Fed’s leadership.
A president can only fire Fed board members “for cause,” which is traditionally understood as malfeasance or dereliction of duty.
But the Trump administration appears to be taking a broader interpretation, as Trump fired Cook over mortgage fraud allegations that it denies.
The Supreme Court heard arguments on the issue Wednesday, and Cook emphasized in a statement afterward the importance of insulating the Fed from political threats.
She said her case is about whether the Fed will set interest rates “based on evidence and independent judgment, or succumb to political pressure.”
Pearce flagged a “slight risk” that the government would succeed in removing Cook, saying this could “pave the way for a substantial loosening of the commission over time.”
Policymakers seen as “hawkish” favor higher interest rates to combat inflation, while a “dovish” Fed tends toward lower levels.
Analysts expect Powell will avoid discussing political issues at his news conference after the two-day Fed meeting on Wednesday, as divisions remain over future policy.
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