The Fed sheds one of its three big threats

At the start of the year, Fed watchers were concerned about three threats to the central bank in 2025: that Donald Trump would impose stagflationary tariffs, execute an inflationary fiscal policy and undermine the independence of the Federal Reserve.

He did the lot.

But last Thursday, the US Supreme Court all but removed one of the threats hanging over the Fed. In an emergency ruling, a majority on the court decided that Gwynne Wilcox — who was fired without cause by Trump from the National Labor Relations Board in January — will stay out of her former job while the case goes through the lower courts.

The Supreme Court also indicated that it was minded to overturn 90 years of precedent by ruling that it was unconstitutional for Congress to create positions on similar boards in which officials are protected from being fired, barring cases of serious misconduct.

It was all sounding pretty bad for the Fed’s governors, who have exactly these protections written in law by Congress. Then the Supreme Court’s majority executed a handbrake turn in its reasoning. Even though US central bankers have exactly the same protections, they are employed by “a uniquely structured, quasi-private entity”, so different rules will apply. That is bad news for Wilcox and other public officials fired by Trump, but good news for Jay Powell and other Fed governors.

The ruling did not make a lot of logical sense, as the protections are identical. This is what Lev Menand at Columbia Law School told the FT, and was also the position of the three dissenting justices. But what you, me, Menand or the minority in the court might think frankly does not matter — because the majority on the Supreme Court decides.

Powell is safe; other US officials are not.

Powell then celebrated his new security with a ballsy rendition of the UK’s first world war recruitment poster, “Daddy, what did YOU do in the Great War?” Praising American universities as “a crucial national asset” at a time when the administration is attacking them, he told Princeton graduates to fight for US democracy. “When you look back in 50 years, you will want to know that you have done whatever it takes to preserve and strengthen our democracy, and bring us ever closer to the founders’ timeless ideals,” Powell said.

That leaves two out of three risks

Fed officials’ jobs might be safe, but their reputations still depend on their response to the tariff and budgetary threats hanging over the US economy. I will come back to the specifics of these as policy becomes clearer in the coming weeks, but it is worth documenting how markets and analysts have changed their views on likely Fed monetary policy over the past month.

At the start of May, the stagflationary risks from tariffs dominated. There were fears that very steep tariff increases would slow the US economy to a crawl and force the Fed to ease monetary policy, even if inflation was rising.

Despite Friday’s presidential outburst — when Trump threatened higher tariffs on imports of iPhones and goods from the EU — the emerging view is that an expansionary budget and less severe tariffs removed some of the recessionary threat that would have forced interest rates down. As the chart shows, market expectations of future US interest rates are now significantly higher along the curve by around 0.5 percentage points.

The market’s view is that the Fed will be slower in cutting rates, but that the projected level at the end of 2026 will be roughly the same as it was in early April. If I instead chart the market forward rates for the end of 2025 and the end of 2026, it is clear that in May, there was a growing realisation that the Fed will want to wait and see before changing interest rates.

The FT’s Monetary Policy Radar has taken the view since April that a sensible central scenario would see no US rate cuts at all in 2025, with an alternative scenario containing a significant loosening of policy. We judge the risks of each to be pretty similar.

What is going on with UK inflation?

Last week, UK inflation figures for April brought difficult headlines for the Bank of England. Annual headline inflation was up from 2.6 per cent in March to 3.5 per cent in April, with far from all the action being in energy prices. Core inflation rose from 3.4 per cent to 3.8 per cent.

Everyone knew inflation would rise, because there were significant increases in gas and electricity tariffs already announced in February. There were also specific tax increases, such as vehicle excise duties, and the likelihood of higher airfares because Easter was later in 2025. But the actual figures exceeded the 3.3 per cent increase expected by analysts and the 3.4 per cent expected by the BoE itself.

With the benefit of hindsight, it appears that the bigger problem lay in the forecasts rather than in a nasty surprise in the data. More than the rise in overall inflation can be accounted for by gas and electricity prices, vehicle excise duties and a 27 per cent rise in air fares. These are all one-offs, and airfares are likely to fall back in May.

The BoE has a supercore services inflation which excludes indexed and volatile components, rents and foreign holidays. I calculate it fell from 4.4 per cent in March to 4.2 per cent in April. This is a good measure to use when you know there are volatile components in the data (which forced even the FT core measure of inflation higher). So, April was not quite as awful as it first seemed.

That said, there is no doubt that UK disinflation has slowed, as the chart below shows, when looking at two measures that really try to get at the persistent nature of price movements. There is a balanced debate on the Monetary Policy Committee between those who worry the slowdown in disinflation highlights a deeper problem and those who think it is merely a pause.

The April data also illustrated the need for a common and official measure of inflation adjusted for seasonal effects such as a late Easter. Everyone — including us at the FT — is producing their own seasonally adjusted series, so inevitably there is no shared truth to guide the debate.

The good news is that the Office for National Statistics recognises this is problematic, will consult on the matter over the summer and hopes to be ready to publish next March. At the excellent UK Economic Statistics Centre of Excellence conference last week (disclaimer: I am on its advisory board), Huw Dixon and Monica George Michail presented their analysis of the feasibility of seasonally adjusting UK inflation data.

Read their excellent paper if you want the details. But the summary is that seasonal adjustment is clearly possible, although as the chart below shows, seasonal patterns in pricing do change over time. That means the seasonally adjusted data will get revised — and the most problematic monthly inflation numbers, unfortunately, are almost always the most recent.

What I’ve been reading and watching

A chart that matters

If you are prone to worrying about persistence in inflation, the chart below provides just the shock you crave. Joseph Gagnon at the Peterson Institute and Steven Kamin of the American Enterprise Institute have discovered a cross-country relationship between historic inflation and recent price rises.

Countries that suffered high inflation in the 2000s had higher pandemic-era inflation. This is not just a “proximity to Russia” relationship, and I have improved on the authors’ estimates by including the latest data below.

It appears that central banks’ promises to keep inflation under control are less credible in countries that have experienced high inflation, even in the distant past. To the extent this relationship is causal and holds, future policymakers are in for a pretty rough ride.

Central Banks is edited by Harvey Nriapia