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The US Federal Reserve will unveil its first monetary policy decision for 2025 on today, January 29. This will be the US central bank's first policy verdict after Donald Trump took charge as the 47th US President on January 20. Wall Street anticipates policymakers will leave the federal fund interest rates unchanged until inflation progresses further toward their two per cent target.
Regarding the current US Fed interest rates, Trump has said that he seeks to lower them by unleashing energy production and would speak to the US Federal Reserve if needed. "I'll demand that interest rates drop immediately," he told the World Economic Forum in Davos, Switzerland, in a virtual address last week.
The US Federal Reserve has a dual mandate to act independently and keep inflation and employment in check, primarily by raising and lowering short-term interest rates. Experts believe that under Trump's presidency, there has been a distinct shift in the dynamics between the administration and the US Fed.
Experts say Trump's frequent public appeals for the US Fed to reduce rates, aiming to improve the economy's growth rate, have been seen as unusual in their degree of political pressure on what is meant to be an independent institution. Presidents rarely comment on interest rates set by central banks.
Analysts noted that although the US Fed has remained an independent institution, during this period, the political rhetoric amply reflected how sensitive the markets became to its moves, thereby revealing how fiscal and monetary policies can sometimes overlap each other closely.
“This dynamic betrayed the delicate balance between short-term political goals and the Fed's mandates of fostering long-term economic stability. For observers, it reminded them that monetary policy does not operate in a vacuum but exists within a broader political and economic context, where external pressures can influence market expectations and, to some extent, policymaking priorities,” said Swapnil Aggarwal, Director, VSRK Capital.
At a White House event following Davos, Trump said, "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," in an apparent reference to US Federal Reserve Chairman Jerome Powell.
While speaking to reporters from the Oval Office, Trump said he believed that the US Fed officials would listen to him for interest rate decisions. “If I disagree, I will let it be known," he said. Trump had appointed Powell as the US Fed chairman during his first stint as the US President in the 2016-2020 term.
The US Federal Reserve announced its eighth and final monetary policy decision for 2024 last month and slashed its benchmark interest rate by (25 bps) or a quarter of a percentage point, to 4.25-4.50 per cent. Powell-led rate-setting panel cut the federal funds rate for the third straight meeting after kicking off its policy easing cycle in September for the first time in four years.
US Fed now projects just two quarter-percentage-point rate reductions by the end of 2025, down from their September estimate of four rate cuts. “In considering the extent and timing of additional adjustments to the target range, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” said the FOMC in its policy statement.
While US inflation has "eased significantly," the level remains "somewhat elevated" compared to the US Fed's long-term target of two per cent, said US Fed Chair Jerome Powell in the post-policy press conference. He added that the Fed was now "significantly closer" to the end of its current easing cycle.
“US Fed's final rate cut for 2024 is overshadowed by the December meeting's dot plot update, which significantly revised the expectations for 2025 rate cuts from four to just two," said Dr. Vikas Gupta, CEO and Chief Investment Strategist, OmniScience Capital.
“This adjustment reflects the Fed’s cautious stance in light of inflation showing resistance over recent months and the geopolitical and economic implications of Donald Trump’s election victory,” added Dr. Gupta.
Trump’s stance on tariffs raises the potential for inflationary pressures, prompting the Fed to adopt a wait-and-watch approach. Dr Gupta added that tariffs often likened to the nuclear option in a trade war, are typically leveraged as a negotiating tool rather than an actionable policy.
“Given these dynamics, it is plausible that actual tariffs remain minimal, inflation moderates in 2025, and the Fed revisits its projections for rate cuts, potentially delivering more easing than currently indicated. Investors would do well to maintain a balanced perspective and focus on the long-term trajectory rather than reacting to short-term market volatility,” he added.
According to FX Market Analyst Kyle Chapman at Ballinger Group, Powell may say that Trump's potential policy isn't being integrated into the models. However, that doesn't stop his peers from implicitly including a fiscal inflationary impulse and tariffs in their rate projections. Chapman added that this and the stall in disinflationary progress have led to hawkish expectations.
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