US inflation hits 3%, a full 1% above target

Sticky inflation could put Fed Chair Powell on collision course with President Trump, testing Fed’s independence.

13 February 2025

US headline CPI inflation came in at an eyebrow-raising 3% yesterday, fully 1% above the 2% target rate that defines half of the US Federal Reserve’s (Fed) dual mandate (the other half being to maximise employment).

To be fair, there were some esoteric factors that made this print particularly ‘noisy’. Egg prices, for example, have been rocketing amid avian flu culls. This was making the grocery inflation category a significant contributor to inflation, while the old bugbear of US consumers – car insurance – also rose, along with airfares and shelter. Changes to the seasonal adjustments by the Bureau of Labor Statistics meant that previous inflation prints were revised down slightly, but whatever the technical explanation, the overall picture is of inflation not really going away in the manner that everyone was hoping for. And among said hopefuls of course is the Fed.

Chair Jerome Powell testified to Congress yesterday and was grilled on how independent the Fed would be in the face of the Trump administration’s repeated verbal attacks on the central bank’s independence. Even on the same day as Chair Powell’s testimony (thus probably not a coincidence), President Trump unhelpfully wrote on Truth Social that “Interest rates should be lowered, something which would go hand in hand with upcoming Tariffs! Let’s Rock and Roll, America!!!” While the Fed Chair would rightfully not be drawn on this outburst, yesterday’s inflation print has only added to his already complicated task.

Inflation risks are now firmly to the upside thanks to tariffs, deportations and upcoming fiscal stimulus. The tariff point is particularly ironic. The President sees lower interest rates as a way to mitigate the potential economic fallout of his tariff plan, but this appears to ignore tariffs’ inflationary effects which, if anything, would force interest rates up in response by any sensible, independent central bank. Thus the bond market is now pricing in just a couple of quarter point interest rate cuts out to early 2027, based on the assumption that the Fed will remain independent and focused on the inflation at hand, whatever its source. Of course, this ignores political pressure and the potential for the Trump administration to lean on the Fed’s independence and start to erode it. What would happen to rates then? Would they go to 0%? No less than the future of independent central banking will be at stake unless US inflation starts to cool off of its own accord in the coming months, taking the pressure off the Fed. Given the nature of the Trump economic agenda though, this seems like a long shot.

Barely two rate cuts priced in by early 2027, but expect more if the Fed succumbs to political attacks:

From 13 Feb 2025 to 27 Jan 2027