(Mike Maharrey, Money Metals News Service) The Federal Reserve put a pause on interest rate cuts at its January meeting, finally admitting what I’ve been saying for quite a while: price inflation is still sticky.
As widely expected, the Fed stood pat on interest rates, holding the federal funds rate steady at the current target range of 4.25 percent to 4.50 percent. The central bank trimmed rates at its previous three meetings, starting with a supersized half-percent cut last September when it seemingly declared victory over inflation.
At the first FOMC meeting of 2025, Powell & Company finally acknowledged that price inflation remains a problem. In the official FOMC statement, the central bankers removed language stating, “Inflation has made progress toward the Committee’s 2 percent objective,” and simply conceded “inflation remains somewhat elevated.”
Indeed, it is.
The CPI has climbed the past three months, from 2.4 percent in September, 2.6 percent in October, and 2.7 percent in November. The last time we saw a 2.9 percent handle was in July. In fact, the annual CPI was only 3.1 percent in June 2023.
Meanwhile, core CPI has been mired around 3 percent for months.
Powell signaled that the Federal Reserve wasn’t in any hurry to cut rates again, despite President Trump’s demand that interest rates “drop immediately.”
During his post-meeting press conference, Powell said the FOMC will need to see “real progress on inflation or some weakness in the labor market before we consider making adjustments.”
Powell refused to comment on President Trump’s demands, saying, “It’s not appropriate for me to do so.”
“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,”
The Inflation Problem
Taking something of a wait-and-see attitude, Powell said, “With our policy stance significantly less restrictive than it had been, and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance.”
In fact, monetary policy is not only “less restrictive.” It is loose from a historical standpoint, as indicated by the Chicago Fed’s National Financial Conditions Index (NFCI). The index stood at -0.67 as of Jan. 24, a negative number signaling loose monetary policy.
In other words, despite acknowledging the inflation problem, Fed monetary policy is set to be mildly inflationary.
We’re seeing this inflationary pressure in the increasing money supply.
The M2 money supply bottomed a little over a year ago at $20.60 trillion. Since then, it has crept upward. As of December, it was at 21.5 trillion. That’s the highest level since October 2022.
The money supply rose by 0.4 percent in December alone. This represents an annual monetary inflation rate of nearly 5 percent.
This is – by definition – inflation.
And it underscores an important point: the Fed never did enough to slay the inflation dragon.
To use a sports analogy, it seems like Powell and Company are constantly chasing the game. They fall behind early and desperately try to catch up.
Remember when price inflation first started heating up? For months, Powell and his minions insisted inflation was “transitory” before finally acknowledging the problem and confronting it. Then, despite the fact it’s been clear for months that price inflation wasn’t dead and buried, the central bankers pretended it was, even delivering a third rate cut in December while playing lip service to controlling the inflationary devil.
The Other Problem
Price inflation isn’t the only problem facing the Fed. It also has to contend with a massive debt problem and a bubble economy that it helped create.
The Fed incentivized a borrowing binge and created all kinds of malinvestments in the economy with well over a decade of easy money. It pumped nearly $9 trillion in new money (inflation) into the economy through quantitative easing alone from the onset of the Great Recession through the pandemic. That’s on top of the inflation it created with nearly a decade of zero percent interest rates.
The central bank addicted the economy to easy money and took it away, and now the addict is desperate for another fix.
That monetary malfeasance has consequences that the Fed is trying to avoid by getting rates back to artificially low levels.
In effect, the central bankers at the Federal Reserve are walking a tightrope and their balance isn’t great. As I explained recently, Trump’s demands for lower rates underscore the Catch-22 facing the Fed.
On the one hand, it needs to keep rates elevated to address price inflation.
On the other hand, the debt-riddled bubble economy can’t function in a higher interest rate environment.
Despite the illusion of strength and the Fed’s insistence that economic activity is expanding at “a solid pace,” there are cracks in the foundation. U.S. corporate bankruptcies hit a 14-year high in 2024, outpacing the pandemic era. Meanwhile, the U.S. government is forking out over $1 trillion per year just to service the interest expense on the national debt.
They won’t say it out loud, but Powell & Company knows higher rates are a problem. That’s why they started cutting in the first place, and it’s why Trump is jonesing for lower rates.
The bottom line is the Fed needs to simultaneously raise and lower rates.
Obviously, that isn’t a thing.
The question is – from which side of the tightrope will the central bankers fall?
Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
