As the Federal Reserve prepares to decide on another interest rate cut this week, people close to President-elect Donald Trump’s economic team are urging caution, warning that inflation risks may be underestimated even as price growth has moderated in recent months.
“Powell had better be careful with these rate cuts,” said a person familiar with the team’s thinking. “Bidenflation may not be dead.”
The concerns reflect unease about a series of factors that suggest the economy remains strong, with persistent inflationary pressures that could complicate the Fed’s efforts to balance growth and price stability. A key point of concern is that underlying inflation remains elevated. Core services inflation, excluding shelter—a metric often cited by Fed officials, including chairman Jerome Powell, as a proxy for entrenched price pressures—stood at 4.2 percent in November.
Additionally, the economy continues to grow at a pace that exceeds what the Fed sees as its long-term potential. The U.S. expanded at an annualized rate of 2.8 percent in the third quarter, following 3.0 percent growth in the second quarter. The Atlanta Fed’s GDPNow measure sees the economy growing at a 3.3 percent rate in the fourth quarter. Growth at these levels suggests that current monetary policy may not be restrictive, a view echoed by some Fed officials.
Labor market strength is another sticking point for Trump’s advisers. While the unemployment rate has risen slightly to 4.2 percent, it remains below most estimates of the non-accelerating inflation rate of unemployment, or NAIRU. This measure represents the lowest level of joblessness that can be sustained without spurring inflation. Strong job creation and hiring suggest that the labor market continues to put upward pressure on wages.
Trump advisers point out that when the Fed started cutting rates, it appeared to believe that the labor market was softening and needed lower rates to keep unemployment low. A few months later, that view now looks mistaken.
Indeed, wage growth remains a key indicator of inflation risk. The Employment Cost Index, which tracks wages and benefits, rose 3.9 percent in the third quarter. Average hourly earnings have also picked up in recent months, growing at an annualized pace above 4 percent. Sustained wage growth could feed into broader price increases, complicating the Fed’s task of keeping inflation in check.
Further complicating the picture is the lagging impact of recent monetary policy changes. Since September, the Fed has lowered rates by 75 basis points, a significant move given the long and variable lags through which monetary policy operates. Trump’s advisers believe the full effects of these cuts may not be felt until 2026, making it premature to assess their impact. They also highlighted uncertainty around the neutral interest rate, or R*, which complicates judgments about whether current policy is appropriately calibrated.
There’s a fear within the Trump camp that too many cuts from the Fed could reignite inflation and that public anger over inflation could cost Trump support, just as it appears to have been very costly to President Biden and to Kamala Harris’s campaign for the presidency.
While many analysts still believe that Trump is likely to clash with the Fed, most think the clash would be because Trump wants an easier monetary policy than the Fed. The concerns inside of Trump’s circles, however, indicate the opposite. They are worried the Fed may be too accomodative.
Powell Walks a Tightrope
The Federal Reserve is widely expected to announce another quarter-point reduction in its benchmark rate this week, following earlier cuts in September and November. Fed Chair Jerome Powell has emphasized the need for balance, saying last month, “We’re mindful of the risk that we go too far, too fast, but also of the risk that we don’t go far enough.” Yet the central bank faces growing scrutiny from both hawkish officials and outside observers, including members of Trump’s economic team, who argue that the case for further easing is not clear-cut.
People familiar with the Trump team’s thinking have also pointed to policy risks tied to the incoming administration. Trump’s plans to impose tariffs and tighten immigration controls could disrupt supply chains and potentially put upward pressure on prices of some imports, although tariffs are unlikely to create sustained inflationary pressure.
Navigating Uncertainty
Powell’s decision this week could set the tone for monetary policy in the early months of Trump’s second term. The Fed’s actions are likely to be accompanied by updated economic projections, signaling its broader intentions for 2025 and beyond. People close to Trump’s economic team have urged caution, warning that further rate cuts could overstimulate the economy and fuel inflation.
“It’s not clear that monetary policy is tight,” one adviser said. “With growth above potential and wages still climbing, the Fed risks stoking inflation rather than curbing it.”
The stakes are high for Powell, who has worked to navigate competing risks in a divided Federal Open Market Committee. While some officials support further rate cuts, others remain wary of loosening too quickly. Trump’s advisers, for their part, are keeping a close watch on the Fed’s next move. “There’s too much at stake to move blindly,” one person close to the team said. “The risks of cutting too far could be greater than the risks of holding steady.”