As the new year approaches, Powell is caught in a dilemma again, that is, how to deal with the inflationary pressure that Trump's policies may bring without openly rebelling against him.

On the 27th local time, Nick Timiraos, known as the "New Fed News Agency", published an article saying that the Federal Reserve is trying to re-evaluate the impact of Trump's new administration on the US economy and inflation.

He tried to avoid a conflict with Donald Trump, although some of his colleagues expressed concerns that the president-elect's policies might reignite inflationary pressures.

As Trump is about to take office, the Federal Reserve raises its inflation expectations

The Federal Reserve's latest economic forecasts show that officials expect inflationary pressures next year to be more stubborn than previously expected. Most Federal Reserve officials expect only two rate cuts next year and two more rate cuts in 2026, which is less than the at least four rate cuts expected next year in September.

Now, they expect the core inflation rate (excluding food and energy) to fall to 2.5% next year, higher than the previously expected 2.2%. In addition, 15 of the 19 officials believe that inflation may be higher than expected, a significant increase from 3 in September.

Powell has been careful not to directly tie Fed policy to Trump’s proposals. In a news conference on Nov. 7, days after Trump’s election victory, he made clear that the Fed would not set interest rate policy based on speculation or conjecture about the new administration’s policies.

However, the Fed has often stressed the need for its interest rate policy to be “forward-looking,” meaning that it needs to take into account future price pressures and employment projections. That balancing act has been particularly evident over the past two months.

Trump’s threats to raise or impose new tariffs on trading partners and to tighten immigration rules could push up prices and wages in the short term. However, Trump’s advisers say deregulation and measures to boost energy production could offset higher commodity prices and keep inflation down.

Scott Bessent, the nominee for Treasury Secretary, downplayed the impact of Trump’s proposed tariffs on inflation, arguing that they would not lead companies to raise prices in a sustained manner.

He once said on a radio show hosted by former Trump adviser Larry Kudlow:

Tariffs don't cause inflation because if the price of one thing goes up, unless you give people more money, they spend less on another thing, so there's no inflation.

Will Powell compromise this time?

Powell said at a press conference last week that some Fed officials took potential policy changes into account in their latest forecasts, while others did not. Powell denied that the November election was the main reason officials were more pessimistic about inflation, instead pointing to more resilient inflation data recently.

Tiraos wrote that Powell privately urged colleagues to be cautious in their public statements and not to directly link possible policy changes in the White House to the Fed's response, lest Republicans think the Fed is trying to offset policies they don't like.

This is in line with his long-standing efforts to maintain the Fed's culture, which values nonpolitical, sober analysis. Officials may find themselves under political scrutiny during campaigns or when a new administration makes transformative policy changes. There is also still a lot of uncertainty about the impact of policy changes that a new administration may adopt.

In 2018, when Trump first pushed for an escalation in the trade conflict, the Fed cut rates under presidential pressure. But Timiraos believes that this time around may be different because the underlying conditions have changed. Inflation was low then, and now the U.S. has just been through several years of high inflation.

"In this environment, instead of starting with six years of below-target inflation, you start with several years of above-target inflation," said Michael Feroli, chief U.S. economist at JPMorgan Chase.

In 2018, the Fed simulated the impact of higher tariffs and concluded that the central bank could avoid cutting rates in the face of rising prices as long as two conditions were met: households and businesses expected inflation to remain low, and the price increases were quickly transmitted to the economy.

At a press conference on December 18, Powell cited the briefing from the podium when asked how he viewed the impact of higher tariffs in the current environment.

Powell said:

The committee is currently discussing the path and relearning how tariffs affect inflation and the economy. When we eventually see actual policy, this will allow us to more carefully and thoughtfully assess what might be the appropriate policy response.