Federal Reserve officials face mounting pressure to reconsider their stance on interest rates after a closely watched survey showed businesses expecting the slowest pace of cost increases since the pandemic began—exactly the kind of data the Trump administration has been pointing to in its calls for lower borrowing costs.
On Wednesday, the Federal Reserve Bank of Atlanta reported that firms anticipate their costs will rise just 2.0 percent over the next year, down from 2.2 percent in December. The reading matches the lowest level hit in the post-pandemic era and directly contradicts warnings from Fed officials that tariff policies could fuel persistent inflation.
The decline hands the Trump administration a powerful data point in its ongoing push for the Federal Reserve to cut interest rates. President Trump and his economic advisors have argued for months that the central bank is keeping policy too tight, hampering economic growth and job creation unnecessarily. The business survey suggests they may have a point.
The finding carries particular weight because research has shown that business expectations tend to be among the most reliable predictors of where inflation is actually headed. A 2021 study by Cleveland Fed economists found that firms’ inflation expectations have been notably more accurate predictors of inflation over the following year than other widely cited measures, including consumer surveys and financial market indicators.
The Atlanta Fed survey queries approximately 640 executives and managers who make actual pricing decisions at their firms—asking them to forecast changes in their unit costs over the coming year based on raw materials, energy, labor, transportation, and other expenses.
And they see costs rising at precisely the Federal Reserve’s 2 percent target rate.
The January reading represents a sharp reversal from April, when business inflation expectations spiked to 2.8 percent amid the initial reaction to Trump’s reciprocal tariff announcements. Since that peak, expectations have declined in six out of nine months, suggesting the business community has concluded that tariff policies will not produce the inflationary spiral some economists predicted.
For the Trump administration, which has faced criticism from some quarters that its trade policies would reignite inflation, the data provides important validation. Businesses that have had nearly a year to assess the impact of tariffs and adjust their supply chains are projecting inflation right in line with the Fed’s target.
The timing could hardly be more significant for Fed policymakers. Chair Jerome Powell and other officials have recently signaled that they intend to hold off on further cuts after three quarter-point cuts last year. Fed officials have said they think there may still be inflationary pressure in the pipeline from President Trump’s tariffs.
But the business survey data undermines that rationale. The Cleveland Fed research that examined decades of forecasting performance found that business expectations substantially outperformed household surveys in predicting actual inflation. When forced to choose which signal to trust, the research suggests policymakers should put more weight on what businesses expect than on consumer sentiment.
Fed officials have made “anchored inflation expectations” a centerpiece of their policy framework, arguing that keeping these expectations stable near 2 percent is essential to achieving that inflation outcome in practice. The business survey now shows expectations anchored exactly where the Fed wants them—yet the central bank has signaled it plans to keep rates elevated.
The disconnect creates an uncomfortable position for Powell, who has carefully cultivated the idea that he is protecting the Fed’s political independence. The Trump administration has been publicly critical of the Fed’s cautious approach to rate cuts, with officials pointing to evidence of moderating inflation and slower economic growth as reasons to ease policy sooner rather than later.
The business data gives credence to those arguments. Firms report their current unit costs have risen just 2.3 percent over the past year, and they expect similar modest increases ahead. Their sales levels compared to normal times have increased, and profit margins have improved, suggesting businesses are navigating the current environment successfully without the need for aggressive price increases.
When businesses expect inflation at the Fed’s target, they are less likely to preemptively raise prices, a behavior that can create self-fulfilling inflation dynamics. The decline to 2.0 percent suggests firms see their cost environment as stable and predictable, the kind of conditions that historically have given central banks room to support economic growth.
The pattern in the data also aligns with the administration’s timeline. Business expectations declined sharply in the months following Trump’s election and have now returned to the levels recorded in December 2024, right after his victory. The businesses that were initially concerned about tariff impacts appear to have concluded those concerns were overblown.
This creates a policy dilemma for the Federal Reserve. The central bank has built its credibility around being data-dependent and responding to economic conditions rather than political pressures. But when the most predictive measure of future inflation shows expectations perfectly anchored at the Fed’s target, maintaining restrictive policy becomes difficult to justify on economic grounds alone.
The Fed’s reluctance to cut rates despite this evidence could fuel perceptions that the central bank is being overly cautious. Or worse, that it is resisting administration preferences for reasons unrelated to its economic mandate. Trump has been careful not to directly pressure Powell on specific policy decisions, but his economic team has been vocal about their view that current interest rate levels are too high given actual economic conditions.
The business survey adds empirical support to that position. If the people who set prices expect inflation at 2 percent, and if those expectations are the most accurate predictor of actual future inflation, then the Fed’s primary justification for keeping rates elevated evaporates.
Fed officials have emphasized in recent speeches that they will not prejudge the path of policy and will respond to incoming data. The January business expectations survey represents exactly the kind of incoming data that should matter most to their decision-making. It comes from informed economic actors with superior predictive power, and it shows inflation expectations exactly where the Fed wants them.
The Federal Reserve’s next policy meeting is scheduled for January 28-29. Officials are widely expected to hold rates steady at that meeting, but the business expectations data will intensify scrutiny of their rationale and increase pressure to signal more willingness to cut rates in the months ahead.
