As the Federal Reserve prepares to decide on further interest rate cuts this week, people close to President-elect Donald Trump's economic team say inflation risks may be being underestimated even though price increases have slowed in recent months. It warns that there is a sexual nature and calls for vigilance.
“Mr. Powell should be cautious about this rate cut,” said a person familiar with the team's thinking. “Biden inflation may not be dead.”
The concerns reflect concerns about a range of factors that suggest the economy remains strong, including continued inflationary pressures that could complicate the Fed's efforts to balance growth and price stability. . A key concern is that underlying inflation remains high. Core services inflation excluding housing, a measure often cited by Fed officials including Chairman Jerome Powell as a proxy for persistent price pressures, reached 4.2% in November.
Moreover, the economy continues to grow faster than the Fed considers its long-term potential. The United States grew at an annual rate of 2.8 percent in the third quarter, following 3.0 percent growth in the second quarter. According to the Atlanta Fed's GDPNow index, the economy is expected to grow 3.3% in the fourth quarter. Such levels of growth suggest that current monetary policy may not be restrictive, a view echoed by some Fed officials.
The strength of the labor market is another hurdle for President Trump's advisers. The unemployment rate rose slightly to 4.2%, but remains below most estimates of the non-accelerating unemployment rate and inflation rate (NAIRU). This indicator represents the lowest level of unemployment that can be sustained without increasing inflation. Robust job creation and hiring suggest continued upward pressure on wages in the labor market.
Trump's advisers say that when the Fed began cutting rates, it likely believed that the labor market was softening and that lower rates were needed to keep unemployment low. A few months later, that view now seems wrong.
Indeed, wage growth remains an important indicator of inflation risk. The employment cost index, which measures wages and benefits, rose 3.9% in the third quarter. Average hourly wages have also risen in recent months, increasing at an annual rate of more than 4%. Sustained wage growth could lead to broader price increases, complicating the Fed's mission to rein in inflation.
Further complicating the situation is the delayed impact of recent monetary policy changes. The Fed has cut interest rates by 75 basis points since September, an important step given the long and variable lag in conducting monetary policy. President Trump's advisers believe the full effects of these cuts may not be felt until 2026, making it too early to assess their impact. They also highlighted the uncertainty surrounding the neutral interest rate (R*), which complicates determining whether current policy is appropriately adjusted.
Within the Trump camp, there are concerns that too many Fed rate cuts could reignite inflation, just as it appears to have cost Biden and Kamala Harris' presidential campaigns dearly. There are concerns that anger could cause Trump to lose support.
Many analysts still believe that Mr. Trump is likely to clash with the Fed, but most believe that the conflict will be because Mr. Trump wants a more accommodative monetary policy than the Fed. are. But concerns around Mr. Trump suggest the opposite. They worry that the Fed is being too accommodative.
Mr. Powell walks a tightrope.
The Fed is widely expected to announce another quarter-point cut in its benchmark rate this week, following rate cuts in September and November. Federal Reserve Chairman Jerome Powell has emphasized the need for balance, saying last month: “We're mindful of the risks of going too far, too quickly, but we're also mindful of the risks of not going far enough.'' But the central bank faces increased scrutiny from both hawkish officials and outside observers, including members of Trump's economic team, who say the basis for further easing is unclear.
Those familiar with the Trump team's thinking also pointed to policy risks related to the incoming administration. President Trump's plans to impose tariffs and tighten immigration controls could disrupt supply chains and put upward pressure on the prices of some imported goods, but tariffs could cause sustained inflationary pressures is low.
overcome uncertainty
Powell's decision this week could shape the direction of monetary policy in the early months of President Trump's second term. The Fed's actions are likely to be accompanied by updated economic forecasts, signaling broader intentions for 2025 and beyond. Sources close to President Trump's economic team have warned that further rate cuts could overstimulate the economy and accelerate inflation.
“It's not clear that monetary policy is tightening,” said one adviser. “With growth still above potential and wages still rising, the Fed risks promoting inflation rather than reining in it.”
The stakes are high for Mr. Powell, who has sought to avoid competing risks within the divided Federal Open Market Committee. Some officials support further rate cuts, while others are wary of easing them too soon. President Trump's advisers are closely monitoring the Fed's next move. A source close to the team said, “There are too many risks to move blindly.'' “The risk of cutting too much may be greater than the risk of remaining stable.”
