Yen's Sharp Drop Triggers Election and Intervention Fears

Top figures from global central banks and Wall Street have rallied in support of Federal Reserve Chair Jerome Powell after the Trump administration threatened him with a criminal indictment. Powell characterized the move as a form of intimidation, sparking a defense from financial leaders who underscored the critical importance of the Fed's independence.

The wave of support highlights the relationships Powell has cultivated and the central bank's vital role in global financial markets. It follows pushback from Republican lawmakers, including members of the Senate Banking Committee, who could block the nomination of a successor to Powell when his term ends in May.

Renovation Probe Sparks Indictment Threat

The controversy escalated after Powell revealed on Sunday that the U.S. Justice Department had issued subpoenas concerning his testimony to Congress about the $2.5 billion renovation of the Federal Reserve's Washington headquarters. Powell stated that the investigation was a pretext designed to pressure the central bank into cutting interest rates, a long-standing demand from President Trump.

The Federal Reserve's headquarters in Washington, the subject of a controversial renovation probe.

Global Central Banks Issue Joint Defense

In a rare joint statement, the heads of 11 of the world's most influential central banks expressed their backing for the Fed chief. "We stand in full solidarity with the Federal Reserve System and its Chair Jerome H. Powell," the statement declared.

Signatories included leaders from the European Central Bank, the Bank of England, and the Bank of Canada, along with the central banks of Sweden, Denmark, Switzerland, Australia, South Korea, Brazil, and France. Officials from the Bank for International Settlements also signed on.

The group affirmed that Powell has acted with integrity and emphasized that central bank independence is a cornerstone of economic stability. "The independence of central banks is a cornerstone of price, financial and economic stability in the interest of the citizens that we serve," they wrote.

Global central bank governors have increasingly coordinated to support financial stability.

Wall Street Warns of "Reverse Consequences"

Leading Wall Street executives also voiced their concerns, warning that political pressure on the Fed could backfire.

JPMorgan CEO Jamie Dimon told reporters the probe "is probably not a great idea," predicting it could have "the reverse consequences of raising inflation expectations and probably increase rates over time."

BNY CEO Robin Vince echoed this sentiment. "Independent central banks with the ability to independently set monetary policy in the long-term interests of the nation is a pretty well-established thing," he said. Vince cautioned against actions that could shake confidence in the Fed's independence, which might ultimately push interest rates higher.

Political Pressure vs. Fed Independence

Independence from government has long been a foundational principle of modern central banking. However, President Trump has repeatedly broken with this tradition, publicly demanding lower interest rates and pressuring policymakers.

On Tuesday, Trump once again called on Powell to lower interest rates "meaningfully," following a government report that showed consumer prices rose 2.7% in December from the previous year.

Central bankers and analysts fear that political influence over the Fed could erode trust in its commitment to its inflation target, potentially leading to higher inflation and volatility in global financial markets. There are also concerns that a politicized Fed might be reluctant to provide the crucial dollar backstop that helps calm international markets during periods of stress. Such a scenario would likely rattle U.S. markets and export instability worldwide, making it harder for other central banks to maintain price stability.

Despite the political drama, traders are still largely betting that persistent inflation will keep the Fed on hold until at least June.

As tax season approaches, many filers could see larger refunds this year due to significant 2025 tax changes. This potential windfall isn't just good news for individual households; experts say it could have a noticeable impact on the broader economy.

The IRS will begin processing individual returns on January 26. The expected increase in refunds stems from President Donald Trump's "big beautiful bill," which introduced several tax-cutting provisions for 2025. Because the IRS did not update tax withholding tables to reflect these changes, many workers' paychecks remained the same throughout the year. The result is that the benefits of the tax cuts will largely be realized when filing returns in 2026.

President Trump projected that 2026 would be the "largest tax refund season of all time," and many tax experts and analysts agree that bigger refunds are likely. However, the final amount owed or refunded will depend on an individual's specific financial situation and how much tax they paid during the year.

Key 2025 Tax Changes Driving Larger Refunds

The legislation signed by Trump reduced individual income taxes by an estimated $144 billion in 2025, according to the Tax Foundation. Several key provisions are behind this change:

• A larger standard deduction

• A more generous maximum child tax credit

• A higher limit for the state and local tax (SALT) deduction

• A new $6,000 tax break for seniors

• New deductions for auto loan interest, tip income, and overtime pay

Heather Berger, a U.S. economist at Morgan Stanley, stated on a January 2 podcast that these changes are expected to "increase refunds by 15% to 20% on average." For context, the average refund for individual filers was $3,052 as of October 17, 2025, with the IRS issuing about 102 million refunds by that date.

The Potential Impact on Consumer Spending

Experts are closely watching to see what Americans will do with this extra cash, as it could temporarily boost consumer spending.

"Our expectation is it would be a positive for consumption," National Economic Council Director Kevin Hassett told CNBC on January 9.

However, spending behavior often depends on income levels. A note from Piper Sandler on October 31 indicated that households earning between $30,000 and $60,000 typically spend about 30% of their refunds on discretionary purchases. In contrast, households earning $100,000 or more spend only about 15%.

Furthermore, a National Retail Federation survey of roughly 8,600 adults in 2025 found that 82% of taxpayers expecting a refund planned to use the money for paying off debt or for savings. Morgan Stanley's Heather Berger also noted that other economic factors, such as inflation from tariffs or higher health insurance premiums under the Affordable Care Act, could influence spending habits.

Could Bigger Refunds Fuel Inflation?

While increased spending can stimulate the economy, some analysts worry that a surge in consumer demand could also create inflationary pressure.

Jonathan Parker, an economist at the Massachusetts Institute of Technology who has researched consumer spending during stimulus cycles, said bigger refunds "could easily be inflationary." He told CNBC that the stimulus checks issued during the Covid-19 pandemic were "certainly correlated" with higher inflation and were a "contributing factor" to the subsequent price boom. The consumer price index peaked at a 9.1% year-over-year increase in June 2022, the fastest rate since 1981.

Former Treasury Secretary Janet Yellen acknowledged in January 2025 that stimulus spending may have contributed "a little bit" to inflation but also pointed to "huge supply chain problems" as a major cause.

When asked about the potential inflationary effects of larger refunds in 2026, Kevin Hassett expressed little concern. "We're not really worried about the inflationary effects of that because we [have] got so much supply coming online again," he said.

The closely-watched consumer price index rose 2.7% in the year to December, in line with the previous month, according to official data published on Tuesday morning, ahead of a speech by the US president on the economy.

Source: Theguardian

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Source: investinglive

The latest Consumer Price Index (CPI) report has reinforced market expectations that the Federal Reserve will hold interest rates steady at its upcoming meeting, with new data showing inflation remains persistent.

According to the U.S. Bureau of Labor Statistics (BLS), the CPI for all urban consumers rose 0.3% in December on a seasonally adjusted basis. Over the last 12 months, the index increased by 2.7% before seasonal adjustment.

Shelter and Food Costs Drive Inflation Higher

A breakdown of the December numbers reveals that key living expenses were the primary drivers of the increase. The cost of shelter continued its upward trend, rising 0.4% and contributing significantly to the overall monthly figure.

Food prices also climbed, marking a 0.7% increase that covered both groceries and restaurant meals. Energy costs added to the pressure with a 0.3% rise.

The market reaction to the report was mixed. While major stock indexes saw modest pullbacks on Tuesday morning, other assets rallied. Bitcoin climbed approximately 1.8%, gold gained 0.51%, and silver surged 3.99% during the session.

Why a January Rate Cut Is Off the Table

With this inflation data in hand, markets are not anticipating a rate cut when the U.S. central bank meets on January 28.

Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, noted that the current situation is familiar. "Inflation isn't reheating, but it remains above target," she explained. Zentner added that limited pass-through from tariffs and ongoing housing affordability issues mean the latest report "doesn't give the Fed what it needs to cut interest rates later this month."

This sentiment is strongly reflected in market pricing and probability tools.

Figure 1: Market data for the January 28 Fed meeting shows a dominant 97.2% probability that the central bank will hold its target rate steady, with only a 2.8% chance of a rate cut.

Traders and Bettors Aligned on Fed's Next Move

The consensus that the Fed will stand pat is widespread. CME's Fedwatch tool indicates a 97.2% probability that interest rates will remain unchanged, leaving only a slim 2.8% chance for a quarter-point reduction.

This view is echoed in betting markets. On platforms like Polymarket and Kalshi, participants have priced the odds of the Fed holding rates steady at 96%.

Even external pressures, such as a Department of Justice probe into the Fed's renovation costs, appear to have little impact on policy expectations. The probability of Chair Jerome Powell facing federal charges by June 30, 2026, is currently estimated at just 12%.

Ultimately, the economic data, market pricing, and expert analysis all point to the same conclusion: the Federal Reserve is firmly in a wait-and-see mode. With inflation still present, markets are content to wait for a clearer signal before pricing in any policy changes.

The battle against inflation hit a snag in December, as rising costs for groceries, dining out, and clothing kept price pressures elevated for American consumers.

The Consumer Price Index (CPI), a critical measure of inflation, rose 2.7% in December from the previous year, according to the Bureau of Labor Statistics. This figure was unchanged from the prior month and matched economists' estimates, suggesting that progress on cooling the economy has stalled.

"The bottom line is, I think inflation is still uncomfortably high," said Mark Zandi, chief economist at Moody's. "Inflation for staples, necessities, remains elevated."

The Tariff Factor: An Upward Push on Prices

A key driver keeping inflation above the Federal Reserve's long-term target of roughly 2% is the tariffs implemented by President Donald Trump. As taxes on imported goods, tariffs are paid by U.S. importers, who are expected to pass at least some of the cost on to consumers.

According to Zandi, these tariffs have added over half a percentage point to the inflation rate. "I think were it not for the tariffs, we would have been back to target already," he noted.

However, the impact on consumers has been less severe than initially feared. Many businesses have absorbed the extra costs into their profit margins to avoid alienating customers with higher prices. Companies that had already imported inventory before the tariffs took effect were also able to maintain typical pricing.

A pending Supreme Court ruling could potentially dismantle the legal framework the Trump administration has used to impose these widespread tariffs. Even without a court intervention, economists widely believe inflation has already peaked and will begin to decline in the latter half of 2026.

"Short of any new tariffs coming online, we think the direction of inflation is lower," said Tom Porcelli, chief economist at Wells Fargo.

Data Quirks and the Fed's Patient Stance

The headline inflation rate may be higher than official figures suggest. The record-long government shutdown, which lasted from October 1 to November 12, prevented federal statisticians from collecting complete data. For the month of October, the BLS assumed no price increases occurred for most goods and services.

Zandi estimates that if the missing data were included, the annual CPI inflation rate would be closer to 3%.

Despite these complexities, underlying disinflationary trends appear positive. This is likely a welcome development for Federal Reserve policymakers, who are considering whether to ease interest rate policy later in 2026.

"We expect officials are happy to remain on extended pause, as they wait and see the impact of their recent string of rate cuts," wrote Michael Pearce, chief US economist at Oxford Economics. "With inflation fears fading, officials will feel freer to respond to downside risks to the labor market, should conditions deteriorate."

Household Necessities Drive Affordability Concerns

Affordability has become a central issue for consumers and politicians alike, with prices for household staples climbing in December.

Key monthly increases from November to December included:

• Food Prices: Both groceries and restaurant meals rose by 0.7%. For inflation to return to the Fed's target, monthly increases generally need to be around 0.2%.

• Clothing: Prices increased by about 0.6%.

• Utility Gas: Piped gas service costs jumped 4.4%.

Over the past year, certain items have seen particularly high inflation due to supply constraints, with coffee prices up about 20% and beef up 16%. Utility gas is up 11% for the year, while electricity has risen about 7%.

However, some of these figures may be skewed by data distortions from the government shutdown. Gargi Pal Chaudhuri, chief investment and portfolio strategist at BlackRock, suggested that holiday discounts were over-represented in the November CPI report. "Those deeper-than-normal discounts pulled prices down in November, setting up an artificial jump when prices normalized later in December," she explained.

Looking ahead, a potential counterweight could come from the housing market. Zandi pointed out that weak rent growth is likely to help pull down overall inflation in 2026 and into 2027.