Aurelia Butler

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This article is an on-site version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersThe possibility of a conflict between the incoming Donald Trump administration’s policies and the Federal Reserve’s price stability mandate has been a topic of discussion since before the election. We have long known — in broad, blurry outline — what the new president’s policy aspirations are. Lower taxes, lower immigration, higher tariffs, a smaller current account deficit. Yesterday came the first intimations — again, broad and blurry — of what the central bank response to all of that might be.The open market committee cut its policy rate by a quarter point, as expected. But the rub was not in their action, but in their expectations. The Summary of Economic Projections, last seen back in pre-election September, showed a 50 basis point increase in the anticipated policy rate for the end of next year. It now stands at 3.9 per cent, a bit more than two rate cuts from where we stand today. The expectation for 2025 inflation rose 40 basis points, to 2.5 per cent. More significantly, perhaps, the committee’s uncertainty about inflation increased dramatically. The range of members’ 2025 inflation projections, from lowest to highest, was 30 basis points in September. Now it’s 80.The natural question, faced with this change, is how much the election altered the committee’s outlook. Several journalists asked away, focusing on the inflationary impact of tariffs. Powell’s answer, somewhat disconcertingly, had two distinct aspects. First he said this:This is not a question that’s in front of us right now. We don’t know when we will face that question. What the committee is doing right now is discussing pathways and understanding the ways in which tariffs can drive inflation in the economy . . . that puts us in [a] position, when we do see what the actual policies are, to make a more careful, thoughtful assessment of what might be the right policy responseThis sounds sensible. Then he said this:Some people [on the committee] did take a very preliminary step and start to incorporate highly conditional estimates of economic effects of policy into their forecasts at this meeting and said so in the meeting. Some people said that they didn’t do so, and some people didn’t say whether they did or not …Some did identify policy uncertainty [as a reason] for writing down more uncertainty about inflation. And the point about uncertainty is its kind of common sense thinking that when the path is more uncertain you go a little bit slower. It’s not unlike driving on a foggy night or walking into a dark room full of furniture.In the letter, the two statements are consistent. Together they say that while possible Trump policies did not enter into the rate decision, they did enter into the SEP. In spirit, though, they are inconsistent, because in central banking, expectations are policy. This was visible in the market reaction yesterday. Faced with a Fed that is worried about Trumpy inflation, and thinking more hawkishly as a result, the S&P 500 fell 3 per cent, two-year bonds rose 14 basis points, and 10-year bonds rose 10 basis points. Small-cap stocks, darlings of the Trump Trade, fell hard and have now given up all their post-election gains:Have the Fed members made a mistake, thinking they know what Trump’s policies will be, and how they will impact the rate trajectory? And in so doing, did they show some political bias? On both fronts, I’d say they probably have. Everyone seems to think they know what the second Trump administration will do. But the president’s mercurial leadership style, his heterogenous cabinet picks, and his party’s narrow margins of control in both houses of Congress mean confidence on this topic is foolish. Arguments that tariff and immigration policy must cause persistent inflation are a bit wobbly, compound the overconfidence problem, and smell of motivated reasoning.Before condemning Powell and his colleagues, however, remember three things.One: the committee also had good non-political reasons to increase their inflation expectations. The last two consumer price index inflation readings have been discouraging, and growth has continued to come in hotter than expected. Indeed, plenty of pundits have argued even today’s cut was a mistake (imagine the market reaction if the committee had stood pat!). Some rewriting of the 2025 expectations was already in order; don’t overstate the political aspect.Second: no plan survives contact with the enemy. We are still in the realm of expectations. The real battle between Trump fiscal policy and Fed monetary policy has not been joined, and when it is, the picture will change. It need not be bloody. Chair Paul Volcker and president Ronald Reagan had a lively tug of war in the 1980s, and the country was just fine.Finally: do not overread the market’s reaction. Stock valuations are historically high and the bull market has been running for a long time. Expectations that the Fed will cut rates next year are entrenched. In this environment, it will not take much of an increase in rates expectations to whipsaw the stock market. That is something Trump and Powell will both have to keep in mind.Cars and 2025 We promised our 2025 predictions would come today, but in the face of yesterday’s consequential Federal Reserve meeting, they will have to wait. We did get a lot of responses on people’s favourite cars, though. They showed Unhedged readers are a sundry bunch. One reader emailed simply “Ferrari 286 GTB”; another talked lovingly of a 2008 Toyota Rav4. Some kept it current with electric cars from Tesla and BMW; others went old school with the Volkswagen T4 camper van or the now-extinct Lancia Kappa. The automobile industry is struggling, but people sure do love their cars. Email us with the worst one you’ve ever owned: robert.armstrong@ft.com and aiden.reiter@ft.com.One good watchFrom Frankfurt, with love.FT Unhedged podcastCan’t get enough of Unhedged? 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Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.As precious gifts go, olive oil, gallium and container ships don’t quite hold the same festive symbolism as gold, frankincense and myrrh. Yet as Christmas approaches, let us appreciate the true magi of globalisation in 2024: consumer rights activists from Spain, mineral dealers from Japan and shipbuilders from China.The year has seen the usual stream of warnings that trade is about to collapse. There are fewer follow-up stories detailing how systems coped, how markets reacted and how problems moderated or disappeared. I may repeatedly harp on this particular theme but someone has to be a counterweight to the catastrophising about globalisation, and it turns out it’s me.So let’s have a look at the crises that didn’t happen or eased this year. First up are the sharp increases in global olive oil prices, which more than doubled between mid-2022 and mid-2023, after droughts in Europe. Spain, the world’s largest exporter and one of its biggest consumers of olive oil, where it goes by the name of oro líquido (liquid gold), was understandably distressed.What happened? Imports to Spain from Tunisia increased. Households modified their habits, switching from more expensive virgin to less expensive non-virgin blended types, or to sunflower oil. The consumer group FACUA put pressure on supermarkets by running a daily price comparator. Mercadona, the bellwether supermarket chain, repeatedly cut prices from July despite global markets remaining tight. A litre of its standard oil has now fallen from €8 to less than €6. The government helped by cutting VAT on olive oil sales.Some content could not load. Check your internet connection or browser settings.Food costs pushed Spanish consumer price inflation higher than in some other European countries, but it’s a rich country and dearer oil did not exactly throw millions of households into abject poverty. Olive oil production is recovering from the drought and is expected to increase by a third in the 2024-25 harvest. By all accounts Spanish cuisine has, happily, survived.Of course, climate change threatens crop production worldwide. It’s a colossal failure by humanity not to have addressed it. But its effects are mitigated by open markets and smart scientists. The threat of a global food crisis after Russia’s full-scale invasion of Ukraine in 2022 receded further this year, thanks to more bounteous harvests. Crop scientists and innovative agriculture have delivered consistently rising yields.So, what other catastrophes were avoided? Last year ended with trade economists frantically googling “Houthi” to discover exactly who had bunged up the Suez Canal and driven up freight rates. As of this week, according to the specialist news service TradeWinds, the Houthis are reportedly considering running seminars on shipping security — astonishing brass neck if true.More importantly, having initially fallen back early in the year, freight costs then shot higher again in the summer. The increase triggered a fresh round of the kind of warnings last seen in the Covid days of 2021 and 2022 that global shipping would permanently be affected. In the event, shipping industry experts say, it turned out to be a one-off burst of companies rebuilding inventories. Freight rates have fallen since, despite the global volume of containers being carried increasing.Some content could not load. Check your internet connection or browser settings.Some content could not load. Check your internet connection or browser settings.The shipping industry is bracing itself for the possibility of a big reduction in China-US traffic if president-elect Donald Trump imposes high tariffs on imports from China. But the experience of his first term was those imports being replaced by goods from south-east Asian countries such as Vietnam, often adding another stage in the value chain. Shipping lines would have to adjust their routes, originating more journeys in Vietnam, but that’s a question of redirecting the same ships, not a fundamental rewiring of global trade. In any case, a stream of container vessels ordered in recent years, mainly from Chinese shipyards, has started to come into service.Finally, another chapter of a long-running saga was written in 2024 by more announcements of restrictions on critical minerals, apparently designed to hobble strategic rivals by depriving their industries of key inputs. Two weeks ago, China said it was banning exports of antimony, germanium and gallium to the US, tightening up on restrictions it imposed last year.The problem with this as a threat is that, according to customs data, the US has this year already essentially stopped importing germanium and gallium from China. And yet the American semiconductor producers that use the minerals haven’t noticeably ground to a halt. China continues to export to other countries, notably including Germany and Japan, suggesting that gallium ends up in the US via one route or another.In any case, germanium and gallium aren’t uniquely found in nature in China: they’re extracted from zinc and aluminium ores. If prices are high enough, supply will come. The mining company Rio Tinto is looking to set up gallium production in Canada. There will no doubt be more globalisation scares next year, some of them well founded. Of course Trump’s accession to the White House massively increases the genuine threat from governments’ interference in the trading system. But the countervailing forces remain, having had another good year. High prices induce more supply. Blocks on trade spur the creation of new routes. Consumers in high-income countries can absorb shocks. Flexible economies can adjust. All is not lost, and Christmas is coming up. God bless us, every one.alan.beattie@ft.com More

Donald Trump is still weeks away from taking the oath of office, but the president-elect’s vow to enact a sweeping policy overhaul is already looming large over the Federal Reserve.The US central bank trimmed interest rates by a quarter of a percentage point on Wednesday in its third consecutive reduction, but officials’ projections for half as many rate cuts next year as they had forecast in September triggered big market swings.Fed chair Jay Powell said that while the more cautious outlook for rate cuts was prompted by signs that progress on getting inflation down to the central bank’s 2 per cent target had stalled, some officials had also begun to include assumptions about Trump’s policies in their forecasts.“Pretty much every prong of [Trump’s] policy looks like it’s going to threaten their mandate,” said Julia Coronado, a former Fed economist who now runs MacroPolicy Perspectives, referring to the central bank’s aims to keep inflation low and stable and maintain a healthy labour market.Coronado added that the Fed’s message was clear: “We are not in Trump 1.0 any more. This is Trump 2.0, we have above-target inflation and we need to get ahead of this.”Trump’s threats to impose tariffs, carry out mass deportations and slash taxes and regulations could have wide-ranging economic implications, said investors and analysts. Some economists are concerned that the overhaul will lead to higher inflation, lower growth and more volatility.Economists acknowledged the groundwork for a shift to a more gradual pace of rate cuts next year was already taking shape before Trump’s election win in early November. Inflation readings in September and October came in higher than anticipated, supplanting fears about the labour market’s health that had bubbled over the summer.The Fed’s preferred inflation measure, the core personal consumption expenditures price index, rose at an annual rate of 2.8 per cent in October and is forecast to have accelerated to 2.9 per cent in November, according to a FactSet survey of economists.Powell noted these shifts on Wednesday and also made clear that after December’s cut, the Fed had entered a “new phase” in which it needed to be much more “cautious” about its actions given interest rates were now closer to officials’ best estimates of a “neutral” level that neither slows nor accelerates growth.While the Fed’s policy settings were still “meaningfully restrictive”, Powell made clear that more cuts would depend on further progress on inflation.But Powell also signalled a marked shift in the way the Fed was considering the changes that Trump has vowed to enact, diverging from his stance in the aftermath of November’s election that the Fed would not “speculate” or “assume” anything about what the next administration would do.This was most visible in the revised set of officials’ economic projections published by the central bank alongside the rate decision. Rather than a full percentage point worth of reductions for next year, which was forecast in September, most officials projected only half a point. They also scaled back their estimates for 2026 and 2027.Officials also sharply raised their median forecasts for inflation. The “central tendency” for the core PCE price index — which excludes the three highest and three lowest estimates — jumped to a range of 2.5-2.7 per cent. That is up from 2.1-2.3 per cent in September.The scale of adjustments cascaded through financial markets on Wednesday, sending the S&P 500 index down nearly 3 per cent, pushing the dollar to a two-year high and elevating yields on US government debt. Asian equities came under pressure early on Thursday.Dean Maki, chief economist at hedge fund Point72, called the Fed’s shift “striking” and said it was rooted in speculation about Trump. “It’s hard to see why they would have expected so much higher inflation if they are not incorporating things like tariffs into the forecasts.”JPMorgan strategists echoed that sentiment. “Below the surface, we can see tariff concerns could be seeping through to [the] Fed’s psyche,” they said.Speaking to reporters on Wednesday, Powell acknowledged that some officials had taken a “very preliminary step” to incorporate “highly conditional estimates of economic effects of policies into their forecasts at this meeting”.Asked directly about how the Fed was thinking about its policy response to tariffs, the chair said the committee was “discussing pathways” and working to better understand how such policies would affect the economy.“It puts us in position, when we finally do see what the actual policies are, to make a more careful, thoughtful assessment of what might be the appropriate policy response,” he said.A cut at the Fed’s next meeting, in January, was “absolutely off the table”, said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, citing the inclusion of language in the policy statement that has been used in the past to signal a prolonged pause.Derek Tang, an economist at research group LHMeyer, expects the Fed to hold off on additional cuts until June and eventually deliver a total of three for the year. That forecast hinges on inflation expectations staying in check.Tang said he was also worried about the labour market weakening more than expected should Trump’s policies dent growth, which could create complications for the Fed.“People may be underweighting the scenario where the labour market does weaken and the Fed is now caught between higher inflation but also trying to stop the economy from entering a recession,” said Tang. “It’s a double whammy.” More

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