Americans seem to believe that good times are about to roll. The New York Fed’s monthly consumer survey on Monday reported that a growing number of Americans now expect their financial situation to improve over the next year, with the share expressing optimism climbing to its highest level since right before Covid-19 struck the U.S. That’s consistent with other widely cited post-election surveys that say the public is increasingly bullish about the economy’s prospects — particularly Republicans — and that inflation fears have receded. Here’s the rub: Politically toxic inflation is not falling as quickly as many at the Federal Reserve had expected. And with Donald Trump headed back to the White House, a growing number of market participants now expect Fed Chair Jerome Powell and other central bank policymakers to take a slower approach to lowering interest rates over the next year. Inflation has been “running just a hair hot for them,” said Jason Pride, the chief of investment strategy and research at the wealth management firm Glenmede. The “core” consumer price index — which excludes volatile food and energy prices — has grown at an annual rate of 3.6 percent over the last three months. The core personal consumption expenditures index has also remained stubbornly above the Fed’s 2 percent target in recent months. We will get more data on the current rate of inflation when the Labor Department reports the CPI for November on Wednesday morning. If that report is consistent with recent readouts, it would suggest that inflation is continuing to linger like a cough after a bad cold. To be sure, the economy remains healthy. The labor market has stabilized, consumers are continuing to spend at a healthy clip and growth has been steady. But policymakers say they’re treading carefully. Powell said last week that inflation has come in “a little higher” than previously expected and that central bank policymakers might be more cautious as they bring borrowing costs closer to a neutral rate. Cleveland Fed President Beth Hammack, a voting member of the FOMC, has said the central bank may have to slow its pace of rate cuts. Fed Gov. Christopher Waller last week compared inflation to an elusive MMA fighter who “keeps slipping out of my grasp at the last minute,” he said. “But let me assure you that submission is inevitable.” But Trump’s agenda could spoil the Fed’s finishing maneuver. Some economists warn that new tariffs and an immigration crackdown could cause prices to spike. Goldman Sachs analysts wrote on Monday that tariffs could cause consumer prices to rise, particularly if companies pass on higher costs to consumers, which would keep the PCE index above the Fed’s 2 percent target through the end of next year. Leaders at companies like AutoZone and Best Buy say new tariffs would translate into higher prices, and Trump himself said he “can’t guarantee anything” when it comes to how his tariff plans would affect what Americans pay at checkout. The potential inflation that could accompany higher import duties or immigration restrictions, coupled with hotter-than-expected inflation reports in the fall, are two big reasons why market participants dialed back their expectations for future Fed cuts in 2025, Pride said. “There's been a really big adjustment within the past two months,” he said. It’s TUESDAY — I’ll be at the Goldman Sachs U.S. Financial Services Conference over the next couple of days. Are you going to be there? Want to grab coffee? Email me at ssutton@politico.com.
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