The US Federal Reserve will enter a new phase in its monetary policy cycle when it meets for the first time this year: stubborn inflation and the beginning of Donald Trump's second presidential term.
Futures markets widely expect the Fed to hold its target range for US interest rates at 4.25 to 4.50 per cent at the conclusion of a two-day meeting on Wednesday. Considering that inflation remains stubbornly above the Fed's 2 per cent target and the labour market remains strong, traders believe the central bank will not resume cutting interest rates until June, CME Group data showed.
But that pause comes at an awkward time for the Fed.
After his inauguration last week, Mr Trump demanded that the Fed and other central banks around the world immediately lower interest rates.
Addressing leaders in Davos, Mr Trump called on Saudi Arabia and Opec to lower oil prices, while saying he would boost domestic oil production, moves he believes will curb inflation.
However, his push ignores some limits to Mr Trump's power as he does not control Opec's decisions, and some domestic oil companies have baulked at his suggestion to increase output. The president also does not control the Fed's rate decisions, and the central bank asserts it decisions are data-dependent.
His stance also ignores one of the stickier components of inflation – domestic services, which clocked in at 4.40 per cent annually last month.
“That's not really going to change much because of oil,” said Derek Tang, economist and co-founder of the LHMeyer firm in Washington.
That is also before the Fed can even begin to quantify how some of Mr Trump's policies – mainly tariffs and deportation of migrants – will affect the economic outlook.
“The difficulty there is, whether it's immigration or tariffs or tax, some of these things won't change until later, so the Fed doesn't know the details, but maybe people are already reacting now in anticipation,” Mr Tang said.
This will not be Mr Powell's first time wrangling with Mr Trump, although the Fed chairman, who was appointed by Mr Trump to lead the central bank, faced withering criticism from the President for keeping rates elevated in 2018-2019.
So far, the Fed chairman has taken a nuanced approach when pressed about Trump 2.0. Asked about how Mr Trump's policies will affect the outlook, Mr Powell has said it is too soon to say.
“We need to see what they are and see what the effects they will have. We’ll have a much clearer picture … when that happens,” he told reporters in December.
Some, including Fed Governor Christopher Waller – a permanent voting member on the rate-setting committee – have argued the policies espoused by the new President will not be too disruptive to the overall economic picture and will not affect his policy decisions.
But minutes from the Fed's meeting showed that at least a few officials believe “recent higher-than-expected readings on inflation, and the effects of potential changes in trade and immigration policy, suggested that the process could take longer than previously anticipated”.
Still, this week's meeting reflects the new political landscape the traditionally apolitical banking institution faces. During his campaign, Mr Trump said he should hold a vote on the Federal Open Market Committee and claimed he had the authority to fire Mr Powell. The Fed chair, for his part, maintains the President has no legal grounds to sack him.
Meanwhile, the Fed begins another year in which consumers are faced with price pressures and higher borrowing costs.
“At some point, I think the fear is the public is not going to find that acceptable any longer,” Mr Tang said.
