This Is What It Could Take for the Fed to Hike Interest Rates

Economic

Central Bank

Summary:

Some economists are now contemplating what was previously unthinkable — and they are focused on the personal-consumption expenditures price index.

The surprising strength of the U.S. jobs market and the stickiness of inflation have led economists to mull what was once unthinkable — a possible interest rate rise by the Federal Reserve this year.

“We now think the Fed’s cutting cycle is over. The risks for the next move are skewed toward a hike,” said Aditya Bhave, senior economist at BofA Global Research, one of the first Wall Street economists to discuss a hike.

Most economists are not willing to go that far. Many are in the camp of Ryan Sweet, chief U.S. economist at Oxford Economics, who said ”a very long and potentially uncomfortable pause is more likely than a hike.”

Not long ago the consensus on Wall Street was that the Fed would cut rates several times in 2025. Activity in derivative markets show traders now only expect slightly more than one rate hike cut this year. Economists at Goldman Sachs and JPMorgan now see the Fed on hold through June. The Fed now has penciled in two cuts for this year.

While a hike is still considered a long shot, the odds of one are no longer zero, said Gregory Daco, chief economist at EY-Parthenon.

This has led to the question of what would it take for the next move by the Federal Reserve to be a rate hike?

Many economists, including Bhave, said that a rate hike would be in play if inflation as measured by the core personal consumption expenditure index moved back above 3%.

The personal-consumption expenditures price index has been the U.S. central bank’s preferred inflation gauge as it has battled the rise in prices over the last few years in the wake of the 2020 pandemic. Its core rate, which excludes gasoline and food, ran at a 2.8% annual rate in November and has been below 3% since last January.

Bhave said he expects core PCE inflation to soften to about a 2.5% rate in the first few months of this year as strong data from 2024 start to fall out of the data. So a move up after that would be remarkable.

“Going from there to 3% would represent a pretty sizable shock,” he said.

Sal Guatieri, senior economist at BMO Capital Markets, agreed that a 3% core inflation rate would get the Fed’s attention but said the labor market would also have to be a lot stronger for the Fed to move.

“We’re a long way from that,” he said.

Another factor that could lead to a rate hike would be if inflation expectations were to pick up, Bhave said.

Consumers are starting to worry about high inflation, according to the latest survey from The University of Michigan. Long-run inflation expectations rose to 3.3% in January, the highest level since June 2008.

Oscar Munoz, chief U.S. macro strategist at TD Securities, said consumers are concerned about Trump’s import tariff policies.

“People are not concerned about inflation right now but it is more about what’s going to happen in the future. That’s where tariff uncertainty comes in,” he said.

This past week Adam Posen, president of the Peterson Institute for International Economics, said the Fed would be boxed into a corner by the inflationary impact of President-elect Trump’s economic policies, compelling the U.S. central bank to hike its benchmark interest rate by the second half of the year. He cited proposed tax cuts, tariffs and immigration policies, but emphasized that Trump’s tax cuts would ignite further inflation by raising the fiscal deficit outlook.

“I expect them to be tightening once the budget goes through this summer,” Posen said, on Bloomberg TV.

Still, Chicago Fed President Austan Goolsbee said Friday said he thought that rate cuts would still happen, but he said if market-based measures of inflation expectations rise, it would be concerning.

Jeffrey Cleveland, chief economist at Payden & Rygel, said the economy was now in the best of both worlds with a healthy labor market and inflation cooling.

Rate hikes are “not in order” because the Fed doesn’t want to tighten financial conditions so much that the labor market would be derailed, he said.

But Bhave said that the economy seems to be thriving with relatively high interest rates.

“We’re not talking about 200 basis points of hikes. It could be back to a rate of 5.5%. Maybe that doesn’t crush the labor market,” he said.

Fed officials have said they are committed to get inflation back down to 2% but don’t want to damage the labor market.

Sources：MarketWatch

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Economic

Economic Growth Projections Cut Amid Structural Weaknesses

Germany's annual economic report, presented by Economy Minister Robert Habeck, paints a bleak picture of the country's economic trajectory. Initially projected at 1.1%, GDP growth for 2025 has now been revised down to just 0.3%, reflecting an economic slowdown driven by multiple structural and external factors.

Inflation remains stubborn at 2.2%, unchanged from 2024, while the unemployment rate is expected to climb to 6.3%, up from 6% the previous year. The most troubling development, however, is the sustained decline in exports, marking the third consecutive year of contraction. With Germany's economy heavily reliant on global trade, this trend signals deeper vulnerabilities.

The Impact of U.S. Trade Policy and Declining Global Demand

A significant risk factor for Germany's exports is the potential for higher U.S. tariffs under President Donald Trump. His administration has hinted at imposing special tariffs on European goods, which could further erode Germany’s export performance. If these measures materialize, German manufacturing—particularly the automotive and machinery sectors—could face severe disruptions.

The German government has acknowledged these risks, urging the European Commission to expedite new trade agreements that would provide alternative markets for German exports. The annual report underscores the necessity of maintaining and expanding trade relations with the U.S., emphasizing that strategic economic ties must be preserved despite political uncertainties.

Industrial Slowdown and Labor Market Struggles

Beyond external trade pressures, Germany’s domestic economic environment remains fragile. The Institute for Employment Research (IAB) has reported that the country’s labor market index fell for the fifth consecutive month, reaching its lowest level since the COVID-19 crisis in 2020. In January 2025, the index dropped to 98.8, well below the neutral benchmark of 100, reflecting worsening employment prospects.

Manufacturing industries, particularly in mechanical engineering and industrial equipment, are facing sharp declines in orders. A survey by the German Engineering Federation (VDMA) found that 34% of its member companies anticipate severe risks to their order books in the next six months. As a result, 25% of surveyed firms are preparing to cut jobs in the near term.

The downturn is not limited to traditional manufacturing. Germany’s electrical and digital industries are also bracing for contraction, with the ZVEI industry association forecasting a 2% decline in output for 2025. According to ZVEI President Gunther Kegel, excessive regulations and high industrial costs are stifling innovation and reducing Germany’s global competitiveness.

A Government Struggling to Respond

Germany’s ruling coalition has faced mounting difficulties in implementing effective economic measures. The so-called Growth Initiative, a set of policies aimed at strengthening the economy, has been only partially implemented due to political instability. The governing three-party coalition collapsed in November 2024, further complicating economic decision-making.

In this context, businesses and investors remain cautious, delaying investments and expansion plans. The combination of political uncertainty, regulatory burdens, and external trade risks has dampened business confidence, leading to weaker economic activity.

Germany’s Economic Challenges Persist

Germany’s downgraded growth expectations reflect broader structural weaknesses that could extend beyond 2025. The country’s heavy dependence on exports, rising labor market pressures, and regulatory constraints are compounding its economic slowdown. Without significant policy adjustments—such as deregulation, investment incentives, and trade diversification—Germany may struggle to regain momentum.

The coming months will be crucial in determining whether Germany can stabilize its economy. If trade tensions escalate and industrial production continues to decline, the risk of a deeper recession will grow. For now, Europe's largest economy faces a difficult road ahead, with limited room for quick recovery.

Source: MSN

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Political

A Shift in EU Policy on Russian Agricultural Trade

On January 28, the European Commission introduced a proposal to impose tariffs on key Russian and Belarusian agricultural exports, particularly nitrogen-based fertilizers. The EU had previously refrained from targeting these sectors with sanctions to avoid disruptions to global food supplies, especially in developing countries. However, this policy shift signals a new strategy aimed at weakening Russia’s export earnings and mitigating the economic impact of the ongoing war in Ukraine.

According to the EC, the proposed tariffs would serve a dual purpose: protecting EU agricultural producers from unfair competition and reducing Moscow’s ability to finance its military operations. While the details of the tariff structure remain unclear, the commission has indicated that measures will be in place to cushion EU farmers from potential price surges caused by higher import costs.

Notably, the proposed tariffs will not restrict the transit of Russian agricultural products and fertilizers to third countries, ensuring that global supply chains—particularly in food-insecure regions—remain stable.

European Concerns Over Market Competition and Food Security

One of the primary motivations behind the proposal is the increasing pressure from European agricultural producers, who have faced intense competition from Russian imports. Since the start of the war in Ukraine, Russia has continued to expand its agricultural exports, leveraging its vast wheat and fertilizer production capacity to strengthen its position in global markets.

The EC has framed the proposed tariffs as a way to promote supply diversification, encouraging EU member states to source agricultural goods and fertilizers from alternative markets. This aligns with broader European efforts to reduce dependency on Russian commodities across various sectors, from energy to industrial materials.

Additionally, the commission has suggested that safeguards will be introduced to prevent excessive price increases for European farmers. Given that fertilizers are a critical input in food production, ensuring affordability and availability remains a key concern for policymakers.

The Political and Economic Implications of the Tariff Proposal

If approved, the new trade measures could have significant economic and geopolitical ramifications.

Impact on Russia’s Economy: Russia remains one of the world’s top exporters of wheat and fertilizers. By imposing tariffs, the EU aims to erode Russia’s ability to generate foreign exchange earnings from these exports. However, given Russia’s extensive trade ties with non-EU markets, particularly in Asia and Africa, the long-term effectiveness of such measures remains uncertain.

Potential for Retaliation: Moscow could respond with countermeasures, potentially restricting the supply of agricultural products or fertilizers to Europe. While the EU has been working to secure alternative suppliers, any abrupt trade disruption could strain agricultural supply chains and drive up costs for European consumers.

Global Food Security Considerations: The EU has made it clear that it does not intend to block the re-export of Russian agricultural goods to third countries. This is a critical distinction, as previous concerns about food security had led Brussels to exclude food and fertilizer exports from previous sanctions packages. Ensuring that these products remain accessible to developing nations will be key in maintaining diplomatic support from global trade partners.

Next Steps: Approval and Implementation Timeline

The proposed tariffs must be reviewed by EU member states and the European Parliament before they can be enacted. If approved, the measures will take effect after a transition period, similar to the EU’s previous tariff hikes on Russian and Ukrainian grain imports, which took approximately two months to implement.

The decision comes as part of broader discussions on tightening economic measures against Russia, with EU officials seeking ways to limit Moscow’s access to critical revenues while maintaining economic stability within the bloc.

While the full impact of the tariffs remains to be seen, the move signals a further decoupling of EU-Russia trade relations, reinforcing the bloc’s strategy of economic containment amid ongoing geopolitical tensions.

A Strategic Shift with Uncertain Outcomes

The EU’s proposal to impose tariffs on Russian and Belarusian agricultural products and fertilizers represents a significant policy shift. While it aims to reduce Russia’s export revenues and protect European farmers, the move could also trigger economic countermeasures from Moscow and introduce risks of trade disruptions.

As discussions progress, the EU will need to balance economic resilience with geopolitical strategy, ensuring that its measures do not inadvertently escalate market instability or global food security concerns. The coming months will be crucial in determining whether this policy shift effectively weakens Russia’s economic position or leads to unintended consequences for the European and global agricultural markets.

Source: Yahoo Finance

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Economic

Our economists take a look at recent developments in the US, Asia and Europe, as well as in FX, commodities, central banks and rates.

United States

Recent business surveys suggest that the clean election outcome has led companies that delayed investment and hiring due to election/regulatory uncertainty to start putting money to work. Confirmation of an ongoing low taxation environment should also support growth.

However, there are risks too from President-elect Trump’s policy proposals. Significant immigration controls could create labour shortages that constrain growth and push up wages in some areas of the economy. Then there is the uncertainty over trade tariffs. While they should boost the competitiveness of domestically orientated manufacturers, those that rely on international supply chains will face disruption while exporters will be vulnerable to retaliatory measures. It will also inevitably mean higher costs for US consumers, which will erode spending power and keep inflation more elevated. The threat of lingering inflation led the Federal Reserve to signal it will slow the pace of interest rate cuts this year.

A key risk is ongoing sharp increases in Treasury yields with Trump's policies expected to worsen the government’s fiscal position. Debt sustainability concerns in an environment of elevated inflation mean we see the US 10Y yield breaking above 5%. This will push borrowing costs higher for consumers and businesses and act as a brake on growth over the medium to longer term.

Eurozone

Eurozone indicators continue to show weakness. The composite PMI remained below the boom-or-bust level in December, although the services sector exhibited some growth. Loan growth to the private sector decelerated in November, with only a 1% annual increase in loans to non-financial companies.

While the new German government might introduce some fiscal stimulus, it is not expected to have any impact before the second half of 2025. Additionally, several countries are under excessive deficit procedures, forcing them to maintain tighter budgets. We anticipate stagnation over the winter months, followed by a modest recovery, resulting in only 0.7% GDP growth in 2025.

HICP inflation increased for the third consecutive month in December to 2.4%, while core inflation remained steady at 2.7%. Services price inflation rose to 4%, and the disinflationary impact of energy prices is diminishing. With higher energy prices, we expect headline inflation to increase further in the first quarter.

Meanwhile, long-term consumer inflation expectations have risen to 2.4%. Given that ECB monetary policy remains restrictive, the ECB can continue to cut rates in response to the weak growth environment. However, do not expect the bank to accelerate its easing pace.

China

Last month’s main developments were centred on the policy outlook. The Politburo meeting and Central Economic Work Conference signalled a “more proactive” fiscal policy with a higher priority placed on stabilising consumption, and the budget deficit target is reportedly set to be raised from 3.5% to 4% of GDP.

For monetary policy, key meetings signalled a “moderately loose” monetary policy stance for 2025, the first major change in tone since 2011. The People's Bank of China (PBoC) signalled further rate and RRR cuts at an “appropriate timing” at its end-of-year monetary policy committee meeting.

We saw the government loosen its grip on CGB yields in December after repeated interventions to keep yields above 2% earlier in the year. Lower yields will reduce borrowing costs amid the anticipated increase in bond issuance for 2025, but have also weakened the CNY.

Given the lull after September’s monetary easing flurry, markets understandably remain cautious, but signs are that policymakers stand ready to respond to potential shocks in 2025.

Rest of Asia

South Korea has been in the news a lot lately. The political turmoil triggered by President Yoon Suk Yeo's declaration of martial law on 3 December and the tragic plane crash on 29 December have significantly dampened consumer and business confidence. We expect the domestic economy to remain weak until political normalcy returns, yet strong global demand for semiconductors and transportation equipment should lead to solid export growth.

The macro policy will play an important role in restoring sentiment and stabilising financial markets. With inflation still below 2%, the Bank of Korea (BoK) is expected to frontload rate cuts in the first quarter of the year to maximise policy impact (25bp cuts in both January and February). The weakening KRW should be a concern for the BoK, by cutting policy rates faster than Fed, but the BoK’s priority will be to support growth. Meanwhile, the government will also promote stability and recovery through prompt fiscal spending. We expect a sizable supplementary budget in the first quarter.

South Korea's suspended president Yoon Suk Yeol with his wife Kim Keon Hee last year

CEE

Despite last year’s underwhelming economic performance, weaker-than-expected inflation, and general European weakness, central banks in Central and Eastern Europe are taking a hawkish pause in the cutting cycle, which might ultimately mark the end of the cycle. We are far from that scenario for now, but further rate cuts will only be cautious across the region. We expect the economy to recover this year, but we see weaker-than-consensus growth in most places in the region and continue to expect downside surprises. At the same time, higher food and energy prices may push up inflation, making further rate cuts by central banks more difficult.

At the same time, the new year means new fiscal plans and political challenges. Although all four countries in the CEE region are promising lower public deficits than last year, we see upside risks because of several elections this year and the start of election campaigns. Even so, the supply of government bonds will grow year-on-year in most places in the baseline scenario, highlighting another risk for this year with the difficult global conditions and falling demand indicated last year.

Central banks

Federal Reserve

Donald Trump’s policy thrusts are extended and expanded tax cuts, trade tariffs and immigration controls, which should keep the growth story supported in the near term. However, there is concern from the Fed about the inflation implications of trade protectionism and labour supply constraints. There will be fewer and more gradual rate cuts in 2025 versus the second half of 2024.

We forecast 25bp cuts in each of the first three quarters of 2025 versus the market and the Fed favouring two in total for 2025. The cooling jobs market remains an important story while the sharp move higher in longer-dated Treasury yields will push up consumer and corporate borrowing costs. The dollar has risen to a 2Y high on a trade-weighted basis and this too may act as a brake on the economy. As such, the Fed may feel compelled to try and mitigate these factors and cut interest rates a little more than the market is currently pricing.

European Central Bank

If anything, macro data since the ECB’s December rate cut have returned the spectre of stagflation – a scenario that could get worse if trade tensions escalate. This is a complication for the ECB which could further widen the current divergence between hawks and doves.

But will higher inflation in December and potentially also in January stop the central bank from further cutting rates? Not really. At 3%, the deposit interest rate is still restrictive and definitely too restrictive for the current weak state of the eurozone economy. Even if some argue that there is very little monetary policy can do to solve structural issues, political instability and uncertainty in many countries will force the ECB to continue doing the heavy lifting.

Also, as long as the current inflationary pressure is anticipated to diminish over the year, the ECB is likely to overlook the present inflation resurgence. While the experience of being slow to address rising inflation will deter the ECB from adopting ultra-low rates, the desire to stay ahead of the curve remains a compelling reason to return interest rates to neutral as swiftly as possible.

FX

The dollar has started the year largely holding onto the substantial gains made in the final quarter of 2024. The narrative of US exceptionalism is alive and well in FX markets, where investors are now hyper-sensitive to incoming headlines about Trump policy. On an inflation-adjusted, trade-weighted basis, the dollar is now close to levels seen in 1985 – levels which prompted the Plaza Accord. As yet, there have been little or no complaints about these dollar levels from the incoming administration, but that is the risk.

Dollar strength is causing some problems, especially for Japan, China and many emerging markets. USD/JPY is now close to the 158/160 area, where Japanese authorities sold $35bn in July last year. Chinese authorities continue to resist renminbi depreciation, and in Brazil, the local bank has been drawn into a heavy bout of FX intervention too. Unless US trading partners are prepared to offer some sizable fiscal stimulus to support domestic demand as an offset to a more difficult export environment, expect non-USD currencies to remain under pressure this year.

Rates

As we progress through 2025, our vision is for the US 10yr Treasury yield to head toward the 5-5.5% range. Today a 4% SOFR rate coincides with a 4.5% 10yr Treasury yield (50bp spread vs SOFR), and 4.5% was the average Treasury yield seen during the Noughties. We find this relevant as during this decade, US inflation averaged 2.5% and the Fed funds rate averaged 3%, which smacks of an equilibrium (on average).

The Euribor 10Y swap rate should start settling closer to its long-term fair value as the ECB normalises monetary policy. Based on our outlook on nominal growth, we think that 2.7% as the fair value of the 10Y Bund yield is justified. Our baseline scenario sees the ECB settle at 1.75% and the 10Y Bund yield rise to 2.7% by year-end. US to eurozone spreads are liable to remain wide as a theme through 2025, with, if anything, a bias to widen further.

Commodities

The Oil market had a strong end to 2024 and a strong start to 2025 with ICE Brent trading above $76/bbl in early January. In early December, OPEC+ agreed to a further extension to its supply cuts, leaving the market with a smaller-than-expected surplus for 2025. In addition, broader sanctions against Iran and Russia have seen Asian buyers looking for other Middle Eastern oil grades, leading to a stronger Middle East physical market. There is also uncertainty over the Iranian oil supply once Trump enters office later this month.

The European natural gas market has also strengthened with TTF briefly trading above EUR50/MWh. Gazprom’s transit deal with Ukraine expired at the end of 2024 and as a result, Europe has lost around 15bcm of annual gas supply. However, this should be widely priced in, given that Ukraine made it clear for over a year that it did not intend to extend the transit deal. Forecasts for colder weather in early January mean that gas storage could fall at a quicker pace, leaving storage to fall further below the five-year average. EU storage is 70% full, down from 85% last year and below the five-year average of 76%.

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Stocks

U.S. equity indexes dipped and the dollar was firm on Wednesday after the Federal Reserve held interest rates steady and gave little insight into when further reductions in borrowing costs may take place.

After several months in which inflation data has largely moved sideways, the U.S. central bank dropped from its latest policy statement language saying that inflation "has made progress" towards the Fed's 2% inflation goal, noting only that the pace of price increases "remains elevated."

"Businesses are expanding operations, consumers have a healthy appetite for travel and leisure, and animal spirits are still elevated," Jeffrey Roach, chief economist at LPL Financial, said in an email, referring to how emotions shape financial decisions. "These conditions make it difficult for the Fed to cut rates without reigniting broad inflation pressures."

On Wall Street, the Dow Jones Industrial Average finished down 0.3%, while the S&P 500 and the Nasdaq Composite both lost about 0.5%, ahead of earnings from Microsoft, Meta, and Tesla.

Following the market close, Microsoft beat quarterly revenue estimates, while Tesla's fourth-quarter profit margin missed expectations. Meta forecast first-quarter revenue below Wall Street estimates.

European shares had earlier climbed to a record high as strong results from Dutch chip equipment maker ASML sent its stock soaring 5.5% and hoisted the wider tech sector up 2.4%.

Investors seemed to have papered over the global rout suffered on Monday when the emergence of a lower-cost Chinese AI model, DeepSeek, wiped more than half a trillion dollars off Nvidia's value alone.

MSCI's gauge of stocks across the globe fell 0.17%.

BONDS STEADY, OIL PRICES SLIP

In bond markets, the 10-year U.S. Treasury yield was little changed at 4.549%, while the 2-year note yield, which typically moves in step with interest rate expectations for the Fed, ticked up 1.9 basis points to 4.224%.

European yields were also steady, with the European Central Bank expected to cut rates again on Thursday, while the yen nudged higher to 155.34 per dollar after the Bank of Japan's meeting minutes pointed to more rate hikes there.

Traders also digested U.S. President Donald Trump's latest tariff threats after the White House said he still plans to hit Mexico and Canada with steep tariffs on Saturday and he is "very much" considering some on China during the weekend.

The U.S. dollar was firmer against major currencies on Wednesday. It strengthened 0.35% to 0.907 against the Swiss franc and weakened 0.17% to 155.25 against the Japanese yen. The euro was down 0.17% at $1.041.

Oil prices on Wednesday, with the U.S. benchmark settling at a year-to-date low, after domestic crude stockpiles in the world's top petroleum producer and consumer rose more than expected last week.

Brent crude futures settled down 91 cents, or 1.2%, at $76.58 a barrel. U.S. crude futures fell $1.15, or 1.6%, to $72.62.

The day's crypto action came from the Czech Republic, where its central bank Governor Ales Michl said in an interview with the Financial Times that he would present a plan to the bank's board on Thursday to buy bitcoin. He added that, if approved, the bank could eventually hold as much as 5% of its 140 billion euro ($146.13 billion) reserves in the cryptocurrency.

Bitcoin was last trading around $104,000, up about 3.6%. Gold prices slipped about 0.3%.

Source: Reuters

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Central Bank

Political

President Donald Trump wasted no time criticizing the Federal Reserve after it held interest rates steady Wednesday, posting a message to his social media platform Wednesday afternoon arguing Fed chair Jerome Powell and the central bank "failed to stop the problem they created" on inflation.

He also said the Fed "has done a terrible job" regulating banks and argued the institution had spent too much time focused on "DEI, gender ideology, 'green' energy, and fake climate change."

The president said he would address inflation by "unleashing American Energy production, slashing Regulation, rebalancing International Trade, and reigniting American Manufacturing."

"I will do much more than stopping Inflation, I will make our Country financially, and otherwise, powerful again!"

The new comments marked an escalation of what could be a coming clash between the president and the Fed over the direction of monetary policy.

Trump said last week that he would "demand" lower rates and that he thinks the Fed will listen to him. He said he expects to talk directly with Powell "at the right time." Powell said Wednesday he had not spoken with the new president.

Powell did not spend much time Wednesday talking about Trump at his press conference that followed the Fed decision to pause rates, a hold that came after three consecutive cuts at the end of 2024.

"I’m not going to have any response or comment whatsoever on what the president said," Powell told reporters. "It is not appropriate for me to do so."

But it was clear from his comments that several unknowns about the economic policies of the new Trump administration could have a future effect on Fed monetary policy, forcing the central bank to remain cautious about any further actions for now.

"We don’t need to be in a hurry to adjust our policy stance," he said.

Powell cited tariffs, immigration, fiscal policy, and regulatory policy as broad areas that are still not defined as Trump 2.0 gets underway.

"We need to let those policies be articulated before we can make a plausible assessment," he said. “We are going to be watching carefully."

The range of possibilities with Trump’s tariff plans, he added, are "very, very wide," and it’s not yet known how they could filter through to US consumers.

Trump is threatening to impose tariffs on Mexico, Canada, and China as early as this Saturday, a stance that some economists predict will put upward pressure on inflation just as the central bank is trying to ensure that issue is finally under control. Trump Says Powell and Fed "Failed to Stop the Problem They Created" on Inflation_1

Trump Says Powell and Fed "Failed to Stop the Problem They Created" on Inflation_1

Some Fed officials have aired concerns behind closed doors that the trade and immigration policies of the new Trump administration might provide more upward price pressure.

There are some signs, however, that the inflation picture is improving. The latest reading of the Consumer Price Index (CPI) showed slight progress in December after three months of holding steady.

The next reading of the Fed’s preferred inflation gauge — the Personal Consumption Expenditures (PCE) index — is out Friday.

Economists expect annual "core" PCE to have clocked in at 2.8% in December, unchanged from November. Over the prior month, economists project "core" PCE rose 0.2%, faster than the 0.1% seen in November.

While Powell was not willing to discuss Trump Wednesday, he did emphasize that he believes that an independent Fed will continue to do its work without considering politics.

"The public should be confident that we will continue to do our work as we always have, focusing on using our tools to achieve our goals, and, really, keeping our heads down and doing our work," he said.

Trump in his post Thursday accused the Fed of being distracted by DEI and "fake climate change."

The Fed recently withdrew from a global group of central banks focused on how climate change might affect the financial system. Powell said Wednesday the group’s focus was too far afield from that of the Fed.

"I'm aware of how it can look but it really was not driven by politics," he said.

Trump, in accusing the Fed of doing a "terrible job" on bank regulation, said that the Treasury department "is going to lead the effort to cut unnecessary Regulation, and will unleash lending for all American people and businesses."

Source: Yahoo Finance

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Political

Economic

A Direct Challenge to U.S. Sanctions

Despite intensified U.S. sanctions targeting its oil sector, Russia remains undeterred in its efforts to sustain exports. According to Bloomberg, at least three sanctioned oil tankers carrying crude from Murmansk in the Arctic and two more carrying Sakhalin crude are headed to Indian ports. These shipments highlight Moscow’s resilience in circumventing trade restrictions imposed by Washington.

The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) introduced new sanctions on Russian oil logistics on January 10. Under these restrictions, tankers involved in transporting Russian crude risk financial and legal penalties. However, Russia appears to have found ways to maneuver around these restrictions, using a mix of sanctioned and non-sanctioned vessels to continue deliveries.

India, a key buyer of Russian oil since the 2022 invasion of Ukraine, has stated that it will allow sanctioned vessels to dock only if they had received cargo before January 10 and arrived before February 27. However, reports indicate that all five shipments currently en route were loaded after the deadline, raising questions about potential diplomatic and trade tensions.

The Risk of Supply Disruptions and Market Implications

Russia’s ability to sustain oil production hinges on its capacity to evade sanctions and keep crude flowing to global markets. If Moscow struggles to maintain its export volumes, the global oil market could face supply disruptions, overturning previous expectations of a modest surplus in 2025.

Bloomberg’s four-week rolling average tracking Russian oil shipments suggests that overall export flows remained stable in late January despite U.S. pressure. As of January 26, Russia’s daily crude exports rose by 11% to 3.07 million barrels per day, marking an increase of 320,000 barrels from the previous week.

However, a broader analysis reveals a year-over-year decline. In the first four weeks of 2025, Russia’s average daily crude exports were 290,000 barrels lower than in early 2024—a 9% decrease. This suggests that while Russia is still managing to navigate sanctions, export levels remain under strain.

The distribution of Russia’s oil exports has also shifted. Increased shipments from the Arctic and Pacific regions are compensating for declining flows from Baltic ports, including Ust-Luga and Primorsk. The Baltic ports have seen sustained export reductions since December, indicating logistical adjustments in response to sanctions.

Murmansk Shipments and Strategic Maneuvering

Shipping data from Bloomberg confirms that three sanctioned tankers left Murmansk in the week ending January 26, passing through the Suez Canal en route to India. These vessels, operated by Russian energy giant Gazprom Neft, used a transshipment strategy—first transferring crude to a floating storage facility at Murmansk before loading onto designated tankers.

Similar tactics are being observed with Russia’s Sokol crude, another key export to India. Some shipments initially listed Indian ports as their destination but later transferred oil mid-journey to non-sanctioned vessels. For instance, the vessel Viktor Konetsky originally indicated it was heading to India’s Sikka port but later offloaded its cargo onto a non-sanctioned vessel near Nakhodka, Russia. Its final destination remains unclear.

Another vessel, Pavel Chernysh, has been anchored near Yeosu, South Korea, for over a week. This location is known as a hub for ship-to-ship oil transfers, a common practice for circumventing sanctions.

Will Sanctions Enforcement Intensify?

The extended journey of these shipments—taking nearly a month from Russia’s Arctic and Pacific ports to India—provides Moscow with time to assess shifts in geopolitical and trade dynamics. Indian refineries remain hopeful that the U.S. may soften enforcement under President Trump’s administration, which could potentially roll back or modify the sanctions introduced in Biden’s final months in office.

If the U.S. escalates enforcement actions, it could significantly impact Russia’s oil logistics and revenue streams. Secondary sanctions targeting financial institutions or insurance providers linked to Russian oil shipments could make it more difficult for Moscow to execute these trades.

However, if Russia successfully maintains its export flows, it would highlight the limitations of Western sanctions in disrupting global energy markets. With major buyers like India and China continuing to purchase Russian crude, Moscow may find enough loopholes to sustain its oil economy.

A High-Stakes Energy Battle

Russia’s continued oil exports to India in defiance of U.S. sanctions underscore the complexities of enforcing global trade restrictions. While sanctions have introduced logistical challenges, they have not yet crippled Moscow’s ability to supply crude to key buyers.

The next few weeks will be critical in determining whether Russia can maintain its current export levels or if Western restrictions will tighten further, disrupting flows. For now, Moscow’s ability to sidestep sanctions remains a crucial factor in shaping the global oil market in 2025.