Economy

Powell’s challenge lies in managing monetary policy without appearing to preemptively counter potential inflationary pressures from the incoming administration’s policies.The balancing act has been evident in recent months. Shortly after Trump’s election victory in November, Powell emphasized that the Fed wouldn’t speculate on how future policies might influence interest rates.“We don’t guess, we don’t speculate, and we don’t assume,” Powell said on Nov. 7. However, the Fed’s latest projections suggest some officials are already accounting for policy changes, signaling fewer rate cuts in 2025 due to inflation concerns.Last week, the Fed cut rates by a quarter point, completing a full percentage point reduction since September. Despite this, updated forecasts revealed a more cautious stance on easing.Most officials now anticipate only two cuts next year, down from four projected in September. Inflation is expected to remain at 2.5% in 2025, up from earlier forecasts of 2.2%. Notably, 15 of 19 Fed officials see a risk that inflation could exceed projections.Michael Gapen, chief U.S. economist at Morgan Stanley (NYSE:MS), noted the shift. The latest meeting “came out much more hawkish than we thought because they did what they said they weren’t going to do: They said they weren’t going to speculate on policies and then a month later they decided to speculate on policies,” he said.A key factor behind this caution is Trump’s proposed economic agenda, which includes tariffs and stricter immigration policies. Tariffs could drive prices higher, while tighter border controls might constrain labor supply, increasing wages. Powell has downplayed the direct impact of Trump’s election on inflation forecasts, attributing the shift to recent inflation data instead.Despite this, Powell has, according to the Wall Street Journal, privately advised colleagues to tread carefully in public remarks to avoid perceptions of political bias. This approach aligns with Powell’s efforts to maintain the Fed’s reputation for apolitical, data-driven decision-making.The stakes are high. Powell recalls the Fed’s experience during Trump’s first term when trade wars led to rate cuts. Yet the current environment differs. Inflation has been elevated, unlike the low-inflation backdrop of 2018. Powell highlighted this distinction at his Dec. 18 press conference, referencing past internal Fed analyses.“What the committee’s doing now is discussing pathways and understanding again the ways in which tariffs can affect inflation and the economy,” said Powell. “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.”Trump’s advisors argue that deregulation and increased energy production could offset inflationary risks. Treasury secretary-designate Scott Bessent downplayed concerns.“Tariffs can’t be inflationary because if the price of one thing goes up, unless you give people more money, then they have less money to spend on the other thing, so there is no inflation,” he said on a radio program hosted by Larry Kudlow, a former Trump adviser.Still, analysts believe the Fed will respond cautiously if supply-side improvements reverse.“In this environment, you’re not coming from six years of below-target inflation. You’re coming from a few years of being well above target,” notes JPMorgan’s chief economist Michael Feroli.Other analysts suggest that the economic environment will significantly influence how much businesses pass rising costs to consumers.Economist Ray Farris believes that with full employment, cost increases are more likely to be passed through than during a downturn. He also highlights the uncertainty around how quickly companies adjust prices, explaining that gradual increases could make inflation appear more persistent to the public. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Mexico is sitting on more than half a billion litres of tequila in inventory, almost as much as its annual production, as the fast-growing industry reckons with slowing demand and the prospect of tariffs on exports to the US under Donald Trump.By the end of 2023, the industry had 525mn litres of tequila in inventory, either ageing in barrels or waiting to be bottled, according to data shared with the Financial Times by the Tequila Regulatory Council. Of the 599mn litres of tequila produced last year, about one-sixth remained in inventory, according to the figures. “Much more new spirit is being distilled than is being sold, and inventories are starting to accumulate,” said Bernstein analyst Trevor Stirling, attributing the build-up to falling demand and new distillery capacity that has recently begun operating in Mexico. “The tequila industry is set for a very turbulent 2025.”Consumers’ thirst for Mexico’s national drink grew rapidly over the past decade as the spirit went mainstream in the US, partly thanks to celebrity-backed brands such as George Clooney’s Casamigos.But demand has fallen back over the past 18 months as the pandemic spirits boom subsided and consumers cut back on their drinking in response to higher prices. The amount of spirits sold in the US in the first seven months of the year shrank 3 per cent compared with the same period last year, according to drinks data provider IWSR. Tequila consumption fell 1.1 per cent, compared with a 4 per cent rise in 2023 and a 17 per cent rise in 2021, the height of the tequila surge.Though some of the inventory is in the process of being aged, rather than just awaiting bottling, tequila evaporates rapidly compared with other ageing spirits — partly because of Mexico’s warm climate — meaning that most tequila is not left in barrels beyond three years. Demand has fallen back over the past 18 months as the pandemic spirits boom subsided More

TUNIS (Reuters) – Tunisian central bank said on Saturday it had left its benchmark interest rate unchanged at 8%, adding that borrowing costs were consistent with the inflation outlook. Inflation will average 7% this year before dropping to 6.2% in 2025, the bank said in a statement following its board meeting. More

Prime Minister Giorgia Meloni’s third budget aims to lower next year’s fiscal deficit to 3.3% of gross domestic product (GDP) from a targeted 3.8% in 2024, while cutting taxes for low and medium income brackets. Italy is under European Union orders to slash its deficit after huge overshoots in 2022 and 2023, and has pledged to bring it below the EU’s 3% of GDP ceiling in 2026.However the public debt, proportionally the second highest in the euro zone, is projected to rise through 2026 due to the delayed effect of costly state subsidies for energy saving building work – the so-called “superbonus”.The Treasury forecasts the debt to climb from 134.8% of GDP last year to 137.8% in 2026, before marginally declining.The rightwing government won the final vote on the budget after a second reading in the upper house Senate by 108 to 63. It was approved by the Chamber of Deputies last week.The package widens next year’s deficit to 3.3% of GDP from an estimated 2.9% based on current trends, borrowing an extra 9 billion euros ($9.4 billion) to fund tax cuts and some other expansionary measures. The euro zone’s third largest economy has stagnated in recent months, and growth this year is now seen coming in at around half of the government’s official 1% target.The slowdown may have been even sharper but for the regular arrival in Rome’s coffers of tens of billions of euros from the European Commission under the EU’s post-COVID-19 Recovery Fund.Rome’s fiscal consolidation efforts may be helped, however, by a decline in borrowing costs.The parliamentary budget watchdog forecast this month that yields on Italian sovereign bonds will be significantly lower than projected by the government, with savings of 1.7 billion euros next year and 17.1 billion by 2029. ($1 = 0.9590 euros) More

NEW DELHI (Reuters) – The body of Manmohan Singh, the former Indian prime minister whose death has sparked outpourings of grief at home and accolades from abroad, was cremated on Sunday on the banks of the Yamuna River in New Delhi with full state honours.The funeral was conducted in the Sikh tradition as priests chanted hymns, after Singh’s body, draped in the Indian flag, was carried through the capital on a flower-decked carriage pulled by a ceremonial army truck.The flag was removed and the body covered with a saffron cloth before it was placed on the pyre.Since Singh died on Thursday at 92, many have taken up his comment near the end of his 10-year rule that “history will be kinder to me than the contemporary media”.He was referring to a perception of weak leadership as he headed a coalition government facing numerous charges of corruption, which was thrown out of office in the 2014 election won by his successor Narendra Modi.Modi, who called Singh one of the nation’s “most distinguished leaders” after his death, attended the funeral, along with President Droupadi Murmu and representatives of various countries. Modi’s government has decided to allocate land for Singh’s memorial.Singh, considered the architect of India’s economic liberalisation, had criticised Modi’s economic policies such as demonetisation and introducing a goods and services tax.Singh is survived by his wife and three daughters.Congress Leader Rahul Gandhi accompanied Singh’s family on the truck to the Nigambodh Ghat cremation site after the procession from party headquarters in New Delhi, where people joined Congress party leaders and members to pay their last respects.The leaders of the U.S., Canada, France, Sri Lanka, China and Pakistan were among those expressing grief at Singh’s death and highlighting his international contributions. (This story has been refiled to say ‘sparked’, not ‘spark’, in paragraph 1) More

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WASHINGTON (Reuters) – The U.S. Treasury Department may need to take “extraordinary measures” by as early as Jan. 14 to prevent the United States from defaulting on its debt, Treasury Secretary Janet Yellen told lawmakers in a letter on Friday.Yellen urged lawmakers in the U.S. Congress to act “to protect the full faith and credit of the United States.”U.S. debt is expected to decrease by about $54 billion on Jan. 2 “due to a scheduled redemption of nonmarketable securities held by a federal trust fund associated with Medicare payments,” she added.She said: “Treasury currently expects to reach the new limit between January 14 and January 23, at which time it will be necessary for Treasury to start taking extraordinary measures.”Under a 2023 budget deal, Congress suspended the debt ceiling until Jan. 1, 2025. The U.S. Treasury will be able to pay its bills for several more months, but Congress will have to address the issue at some point next year.Failure to act could prevent the Treasury from paying its debts. A U.S. debt default would likely have severe economic consequences.A debt limit is a cap set by Congress on how much money the U.S. government can borrow. Because the government spends more money than it collects in tax revenue, lawmakers need to periodically tackle the issue — a politically difficult task, as many are reluctant to vote for more debt.Congress set the first debt limit of $45 billion in 1939, and has had to raise that limit 103 times since, as spending has consistently outrun tax revenue. Publicly held debt was 98% of U.S. gross domestic product as of October, compared with 32% in October 2001. More