Fed Faces Pressure as December Inflation Data Shows Mixed Signals Amid Trump Administration Tensions

Inflation Remains Elevated Despite Slight Decline

The Labor Department reported that consumer prices rose 2.6% in December compared to a year earlier, down from 2.7% in November, according to economists' estimates. However, monthly prices increased 0.3% in December, faster than the Federal Reserve's 2% inflation target, signaling that cost pressures continue to weigh on consumers' wallets despite some relief in gas and used car prices.

Electricity, groceries, and clothing costs may have jumped in December, maintaining pressure on household budgets. The data comes after months of uncertainty caused by the government shutdown, which disrupted price collection in October and raised questions about the reliability of November's figures.

Fed Divided on Rate Cut Strategy

The Federal Reserve's 19-member interest-rate setting committee remains sharply divided over whether to cut rates further or maintain the current level of approximately 3.6% to combat inflation. Fed Chair Jerome Powell indicated at a recent press conference that the central bank would likely hold off on additional cuts to assess how the economy evolves.

Rate setters have been split between those wanting to loosen policy to support the labor market and those concerned that sticky inflation warrants continued caution. Markets currently do not expect a rate cut until June, following three consecutive 25-basis-point cuts at recent meetings.

Trump Administration Escalates Pressure on Fed Leadership

The Trump administration has intensified its attacks on the Federal Reserve and Chair Powell, with the Department of Justice serving the central bank with subpoenas related to Powell's congressional testimony in June regarding a $2.5 billion renovation of two Fed office buildings. Trump administration officials have suggested that Powell either misrepresented changes to the building project or altered plans inconsistently with those approved by planning commissions.

President Trump has harshly criticized the Fed for not cutting its key short-term rate more sharply, arguing that deeper cuts would reduce mortgage rates and the government's borrowing costs for its substantial debt. However, the Fed does not directly control mortgage rates, which are set by financial markets.

Economic Data Signals Broader Slowdown

Beyond inflation concerns, broader economic indicators suggest stalled business conditions. PMI data for November and December indicated only modest growth, with subdued activity across sectors. The week ahead will bring additional economic updates including US retail sales, industrial production, and producer prices, which will provide further insights into the inflation trajectory and inform future Fed policymaking.

In the United Kingdom, employment challenges have intensified, with job losses reaching worrying levels throughout 2025 following changes to employment taxes and minimum wage policies. These international economic headwinds add complexity to the Fed's decision-making environment.

Market Sentiment Remains Cautious

Wall Street remains on edge amid the Fed tensions and policy uncertainty. The "Sell America" trade has returned as investors grapple with conflicting signals about monetary policy direction and the administration's regulatory approach. Fund managers have shown improving risk appetite in recent surveys, fueled by expectations of looser monetary policy and improved economic growth prospects, though this optimism faces headwinds from current inflation data and political pressure on the Fed.