The U.S. Federal Reserve is largely expected to keep interest rates steady following the January 28-29 meeting this week, marking the first pause in the rate-cutting cycle that began in September. Decisions by President Donald Trump that are likely to shape the economy this year, including his demands that the Fed continue lowering borrowing costs.
Trump has already raised economic concerns by calling for restricting immigration and raising import taxes, and on Thursday told global business leaders he would call on the Fed to cut interest rates. “I’ll demand that interest rates drop immediately, and likewise they should be dropping all over the world,” he said at the World Economic Forum Annual Meeting in Switzerland last week.
U.S. central bank to lower borrowing costs twice this year
Since the Fed’s December meeting, data has maintained the core view among Fed officials that inflation will continue to move steadily towards the 2 percent target, with a low unemployment rate and continued hiring and economic growth. The market is pricing in the possibility that the U.S. central bank will lower borrowing costs twice by the end of this year amid signs of inflationary pressures following Trump’s inauguration.
Trump’s policies will most likely influence the Fed’s policy decisions moving forward. The central bank has managed to decrease inflation to around its 2 percent target following its surge to a 40-year high in 2022. After cutting the benchmark interest rate a full percentage point last year, the Fed will meet on Tuesday and Wednesday, with policymakers likely to keep it in the current 4.25-4.50 percent range.
According to the CME FedWatch Tool, traders are pricing only a 0.5 percent chance that the Fed cuts interest rates to the 4.00-4.25 percent range this week. These bets rise to 38.1 percent for the March meeting and 45.8 percent for the Fed’s May meeting.
Inflation moves steadily towards 2 percent target
The latest data showed that U.S. producer prices increased moderately in December. The U.S. Bureau of Labor Statistics reported that the producer price index, which measures wholesale inflation, rose 0.2 percent in December and the core gauge remained flat during the month. This came on the back of the upbeat U.S. monthly jobs report. However, this data is unlikely to change views that the Fed would not cut interest rates again before the second half of this year amid labor market resilience.
Easing underlying inflation in the U.S. renewed hopes of a less restrictive Fed policy this year. Core inflation unexpectedly slowed, while headline consumer prices showed no significant upside surprises. The U.S. Bureau of Labor Statistics reported that the headline CPI rose 0.4 percent in December and the yearly rate accelerated to 2.9 percent from 2.7 percent in the previous month. Meanwhile, core inflation, which excludes volatile food and energy prices, rose 3.2 percent year-on-year compared to the 3.3 percent increase in November.
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Trump’s policies raise inflation concerns
The minutes from the central bank‘s December meeting indicated that officials are concerned about inflationary pressures stemming from protectionist and expansionary policies under Trump.
Trump said on Friday that his conversation with Chinese President Xi Jinping was friendly and that he could reach a trade deal with China and would rather not use tariffs. This eased worries that Trump’s protectionist policies could boost inflation and supported prospects for additional interest rate cuts by the Fed.
Trump had previously proposed tariffs of up to 10 percent on global imports, 60 percent on Chinese goods, and a 25 percent import tariff increase on Canadian and Mexican products. He also vowed to hit the European Union with tariffs and said his administration was discussing a 10 percent tariff on goods imported from China starting February 1.
In addition, the U.S. and Colombia pulled back from the verge of a trade war after the White House said on Monday that the country had agreed to accept military aircraft carrying deported migrants.
Trump had previously ordered his Administration to introduce emergency 25 percent tariffs on all goods coming from Colombia after the Colombian government refused to allow two U.S. military planes carrying deported migrants to land in the country. Trump also warned that tariffs would increase to 50 percent by next week if the Latin American country refused to comply with his immigration policies, fueling trade war fears and tempering investors’ appetite for riskier assets.
