Inflation, Tariffs, Trifectas: Trump's New Chapter in Political Whack-a-Mole
US inflation in October aligned with market expectations, as the headline CPI increased by 2.6%yoy, up from September's three-year low of 2.4%. Core inflation, excluding food and energy prices, remained steady at 3.3%, while the super core CPI (core inflation less housing) printed 4.4%yoy. The CPI data also matched the Cleveland Fed’s Nowcast model, which forecasts year-on-year headline inflation at 2.7% and core at 3.3% in November.
St. Louis Fed President Musalem highlighted yesterday that while the Fed is close to achieving its inflation and employment goals, monetary policy should remain moderately restrictive until inflation fully reaches the 2% target. He noted that recent rate cuts have eased, but not eliminated, policy restraint, calling for patience in evaluating economic data before considering further cuts. Musalem expects inflation to eventually reach the 2% target as the labour market cools but stabilises, though he acknowledged increased risks of inflation stalling or reversing, given October's core CPI, which showed persistent underlying inflation at 0.3% for the third consecutive month.
Earlier, Minneapolis Fed president Kashkari warned that Trump's proposed tariff policies, including a 60% rate on Chinese goods, risk stoking inflation through potential trade partner retaliation. Kashkari cautioned that whilst one-off tariffs might not affect long-term inflation, a "tit for tat" escalation could destabilise the economy and hamper the Fed's inflation control efforts. Despite political pressure from Trump and supporters, Kashkari emphasised the central bank's commitment to independent monetary policy, noting another rate cut might follow in December based purely on economic data. We will look for further clues later today when we hear from Fed Chair Powell and New York Fed president Williams.
In other developments, Trump’s Republican Party now holds a "governing trifecta"—the presidency and both chambers of Congress—giving him significant power to advance his agenda. While both Trump and Biden experienced trifectas in their first terms, neither achieved all their goals: Trump managed to pass tax cuts but failed to repeal Obamacare, while Biden passed several major bills but had to scale back his Build Back Better plan. This time, despite lacking a 60-vote Senate majority and facing some internal resistance, Trump’s position is stronger. With previous Supreme Court appointments, a supportive Senate for his nominees, and control over legislation, he is well-positioned to pursue priorities like mass deportations, tariffs, and environmental rollbacks—though such trifectas rarely endure.
Curiously, Trump’s initial days as president-elect have focused on appointments, including Elon Musk and Vivek Ramaswamy to lead a newly created “Department of Government Efficiency”, or Doge. How fitting—an anti-bureaucracy agency named after Musk's favourite crypto meme.
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