Core

Jerome Powell

Reserve

Jerome Powell and the Federal Reserve are staring down a market that’s already counting on a rate cut this month. Investors have latched onto the latest inflation numbers like it’s a done deal — but it’s not. 
The Fed’s target is 2%, and the path to get there isn’t as smooth as Wall Street wants you to believe. But if Powell folds now, he risks throwing fuel on a fire that hasn’t been fully extinguished. 
Inflation data from November is the perfect example of why caution should rule the day. Consumer price inflation <a href="https://www.cryptopolitan.com/us-inflation-climbs-to-2-7-putting-the-federal-reserve-in-a-bind/">inched up to 2.7%</a>, slightly above October’s 2.6%. Core inflation — the measure that cuts out food and energy — is still stuck at 3.3%. 
That’s the fourth month in a row, which tells you something: the progress we saw earlier in the year may have hit a wall. The Fed doesn’t rely on the Consumer Price Index (CPI) alone; it leans on the Personal Consumption Expenditures (PCE) index. 
PCE inflation is running closer to 2%, but only because it gives less weight to shelter costs — rents, in particular, which have been a main culprit in pushing up CPI. Shelter costs are showing signs of slowing, and that’s good. But it’s not enough. 
<h3 id="span-style-font-weight-400-the-labor-market-isn-t-giving-the-fed-room-to-cut-span">The labor market isn’t giving the Fed room to cut</h3> 
Powell’s second problem is the labor market. Unemployment remains near historic lows. Real wages are climbing, up 1.3% compared to last year. That sounds like great news for workers, but it’s a problem for inflation. 
A tight labor market means employers are paying more, and those costs get passed along. In November, services prices — excluding housing and energy — jumped another 0.3%. That’s above what the Fed’s inflation target allows. 
Car prices are another headache. They’re still elevated, and so are travel costs. Flights, hotels, and rentals — none of them are showing meaningful relief. Combine that with strong wage growth, and you see why inflation hasn’t rolled over yet. 
Then there’s the wildcard: Mr. President Donald Trump. His policy proposals aren’t helping Powell’s case. Trump wants tariffs, and not just a little. He’s floated the idea of a 10% tariff on Chinese imports and even a 25% tariff on Mexico and Canada. 
Economists can’t agree on what happens next. For some, the tariffs are temporary, just a way to bring trading partners to the table. Others think they’re here to stay. Either way, tariffs raise prices, and Powell knows that. 
Trump is also pushing for tax cuts, which could pump more money into the economy. More money means more spending, and that keeps inflation alive. 
A majority of economists surveyed — 56% — <a href="https://www.cnbc.com/2024/12/17/fears-over-inflation-tariffs-cloud-the-economic-outlook-cnbc-survey-found.html" rel="nofollow noopener" target="_blank">expect</a> Trump’s policies to be “somewhat inflationary.” Another 11% think they’ll be “extremely inflationary.” That doesn’t leave much room for a Fed rate cut. 
<h3 id="span-style-font-weight-400-the-fed-s-own-messaging-is-part-of-the-problem-span">The Fed’s own messaging is part of the problem</h3> 
The Fed hasn’t done itself any favors in the way it communicates. It wants two things at once: stable expectations and data-driven decisions. Those don’t always mix. 
On one hand, Powell talks about “forward guidance,” a fancy way of saying the Fed likes to telegraph its moves. Markets eat that up. It means fewer surprises and more stability. On the other hand, Powell says rate cuts depend on inflation data. 
Here’s the problem: the data doesn’t justify a cut right now. But markets are still betting on one because of earlier Fed projections. Powell needs to reset the table. He needs to remind everyone that data comes first. Wall Street doesn’t call the shots. 
Consumer sentiment has bounced back, but the policies driving that optimism — tariffs and tax cuts — come with strings attached. Those strings lead to higher prices. 
Meanwhile, stock market valuations are flashing warning signs. At nearly 25 times the price-to-earnings ratio, the S&amp;P 500 looks bloated. Stocks are expected to rise just 3% next year and 7% by 2026. That’s not much of a cushion. 
Almost 70% of the economists think the market is overpriced, even in a “soft landing” scenario. And while the recession risk is down — currently sitting at 29%, its lowest level in two years — the threat of inflation remains. 
<h3 id="span-style-font-weight-400-holding-steady-is-the-only-reasonable-choice-span">Holding steady is the only reasonable choice</h3> 
Powell has one job this week: keep rates where they are. Inflation is still running hotter than the Fed’s 2% target. The labor market is tight. Trump’s proposed tariffs and tax cuts are looming on the horizon. None of these factors point to a rate cut being necessary. If anything, they’re flashing warning signs. 
Wall Street’s obsession with rate cuts is understandable, but it’s not Powell’s problem. The Fed’s mandate is simple: control inflation and ensure economic stability. Cutting rates now could undo the progress already made. Powell needs to hold firm and let the data decide. 
Markets won’t like it. Investors are betting on a cut, and they’re likely to throw a fit if they don’t get one. That’s fine. As Powell keeps pointing out, his job isn’t to keep Wall Street happy. “It’s to do what’s right for the economy.” 
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Why Powell and the Fed should hold off on rate cuts next year

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