The Federal Reserve’s preferred measure of core inflation, the Personal Consumption Expenditures (PCE) price index, stubbornly rose again in October, growing 2.8% year-on-year and 0.3% from the previous month. While policymakers are cautious about reducing interest rates too quickly, this latest data raises questions about the Fed’s ability to navigate the complexities of inflation. Adding to the mix is a surge in equity-related portfolio management fees, which conveniently inflated the numbers. The irony is that Wall Street’s exuberance plays a role in keeping the inflation dragon alive.

In a telling moment of hesitation, the Fed’s response—or lack thereof—underscores its dual dilemma: inflation isn’t retreating fast enough to meet its 2% target, yet the economy’s resilience leaves little room for dramatic monetary easing. Some might say this cautious stance is a subtle admission of the Fed’s earlier misstep: staying accommodative for too long and now fumbling with mixed signals about rate cuts.

Let’s remember the added complexity of President-elect Donald Trump’s incoming administration and its inflationary overtones. A potential resurgence in trade protectionism could stoke inflationary pressures further, putting the Fed in a precarious position: delay rate cuts too long, and risk throttling growth; move too soon, and risk undermining progress on inflation.

The numbers themselves reveal an inconvenient truth for policymakers. While inflation-adjusted consumer spending crept up a mere 0.1% in October, the annualised three-month core PCE increase of 2.8% suggests inflation is entrenched rather than transitory. It’s no wonder Federal Reserve Chair Jerome Powell and his colleagues are preaching caution. With wages up 0.5% and disposable income rising 0.4%, the savings rate even ticked higher—a rare bright spot. But such data hardly justifies a rush toward easing when inflation lingers stubbornly above target.

Adding to the Fed’s woes are signs of shifting consumer sentiment. Black Friday sales and holiday shopping data will provide a barometer for spending appetites. Still, with Americans increasingly relying on credit and showing cracks in financial resilience, it’s clear that economic pressures are mounting. Lower-income households, in particular, are bearing the brunt, as rising delinquency rates reveal a growing financial strain.

The Federal Reserve’s earlier reluctance to tighten policy aggressively now haunts its decisions. By keeping rates low for an extended period post-pandemic, the Fed underestimated how resilient consumer demand and the labour market would remain in the face of rate hikes. Consequently, inflation has proven far stickier than expected, leaving policymakers stuck between a rock and a hard place.

The October inflation figures also highlight the Fed’s reliance on flawed metrics. Core inflation measures, while helpful, fail to capture the broader dynamics of a post-pandemic economy now influenced by geopolitical uncertainties and shifting consumer behaviours. As Powell himself has alluded, cutting rates in this environment would be premature, yet the window for effective action is narrowing.
Enter Donald Trump, whose trade-heavy, pro-tariff agenda could complicate matters significantly. As tariffs increase import costs, inflationary pressures will almost certainly rise, pushing prices higher across various sectors. Combine that with potential deregulation efforts, and the stage is set for the Fed to face higher structural inflation alongside mounting political pressure.

For now, the Fed’s “wait-and-see” approach seems pragmatic. However, suppose Trump’s policies ignite a fresh inflationary wave. In that case, Powell and his team will be forced into an even more uncomfortable position: hiking rates in an election cycle or risking runaway prices. Either way, the Fed’s predicament highlights the ongoing tension between monetary policy and unpredictable political forces.

While markets remain fixated on short-term data points, the real test lies in how the Fed navigates 2025. Will Powell and his team stick to their guns and prioritise inflation control, or will the pressures of Trump-era economics force their hand? One thing is clear: the Fed’s cautious optimism about the inflation outlook may soon collide with a far messier reality. And this time, the stakes are higher than ever.