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The Fed is about to run into an unstoppable force: Donald Trump
In its first key decision of President Donald Trump ’s second term, the Federal Reserve is widely expected to hit pause on rate cuts Wednesday.
It’s not a decision that is likely to land well with Trump, who has argued that the president should have some say in Fed decisions, explaining “I think I know interest rates much better than they do, and I think I know it certainly much better than the one who’s primarily in charge of making that decision.”
Fed Chair Jerome Powell will have a chance Wednesday afternoon to counter that point during his post-meeting news conference, when he lays out the reasoning behind the central bank’s latest decision.
After finally cutting rates three times in a row late last year, the Fed is about to begin a holding pattern that could stretch through the spring, mostly because of inflation’s limited progress in recent months.
A strong US economy — with low unemployment and healthy growth — also suggests the Fed can comfortably hold off on cutting rates as it waits for inflation to slow further. Fed officials have communicated as much in recent speeches, while also stressing that rates will likely come down eventually. However, traders continue to bet that there won’t be a cut at the Fed’s March meeting, either.
Wall Street will be listening closely to Powell for any hints on the timing of future rate cuts. Investors probably won’t get much clarity there, since questions linger over how Trump’s proposed policies could affect the economy.
“I think Chair Powell is going to do everything he can to minimize a commitment to any future specific policy path,” said Michael Pugliese, senior economist at Wells Fargo. “The Fed is already studying the impacts of broad tariffs, narrow tariffs, different tariff rates, but because there’s not a lot of policy uncertainty here, I’m not sure that they’re inclined to do too much in response to it when the situation is so fluid.”
The Trump factor
In 2018 after the first Trump administration went on a tariff spree, Fed officials in most simulations deemed it appropriate to “see through” the tariff increases, or not hike rates in response, according to a declassified document detailing policy alternatives known as the “tealbook.”
But in one scenario, a combination of a trade war with other countries and rising inflation expectations was the formula for the central bank to raise interest rates.
Trump last week threatened 25% tariffs on goods coming from Mexico and Canada, two of America’s biggest trading partners, starting February 1 , unless those countries offer concessions. If enacted, such a move could jack up prices, undoing some of the welcome progress on inflation the Fed has seen in recent years.
But it’s also clear that Trump likes to use tariff threats as a negotiation tactic — and that even the threat of tariffs can create economic waves. Trump on Sunday announced massive retaliatory tariffs on Colombia, after the South American country blocked US military flights carrying undocumented migrants from landing.
Coffee futures surged on the news and Colombian President Gustav Petro threatened to impose 25% tariffs on all goods from the US. Shortly after the announcement, Colombia reached an agreement with the White House , resuming repatriation flights and preventing any tariffs from taking effect.
Inflation progress back on track?
Inflation seemed to have stalled out in the second half of 2024, with some of that stickiness due to base effects, or unfavorable comparisons with data from a year earlier when price pressures eased dramatically. Rising food prices, which are known to be volatile, have also pushed up overall inflation recently.
Inflation figures for December, however, showed that progress got back on track. The Consumer Price Index for December rose more than anticipated, but a measure stripping out volatile food and energy prices slowed for the first time in months, rising just 0.2% from November and easing to 3.2% after staying stuck at 3.3% since September.
A chorus of Fed officials cheered the data, saying additional progress could put imminent rate cuts back on the table.
“If we continue getting numbers like this, it’s reasonable to think rate cuts could happen in the first half of the year,” Fed Governor Christopher Waller told CNBC earlier this month. “I’m optimistic that this disinflationary trend will continue and we’ll get back closer to (the Fed’s target of) 2% a little quicker than maybe others are thinking.”
Waller, an influential voice at the Fed, said he hasn’t completely ruled out a rate cut in March.
The Commerce Department releases the Fed’s preferred inflation measure, along with December data on household spending and income, on Friday at 8:30 a.m. ET.
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