US Fed plans pause in first rate decision since Trump's inauguration

Photo: AFP

The US Federal Reserve is expected to announce that it will pause cutting interest rates this Wednesday. This decision comes as policymakers continue to tackle inflation while facing close attention from President Donald Trump, who has been outspoken about his desire for the Fed to lower rates.

The Fed had reduced its key lending rate by a full percentage point in the last four months of 2024. Now, they are signaling they will be more careful in the future because inflation has been creeping up and is now higher than the Fed's long-term target of 2%.

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Jim Bullard, the former president of the St. Louis Fed, shared his thoughts, saying, “I think they will do nothing, and I think they should do nothing. The committee’s in very good shape right now.” Bullard’s comment shows confidence in the current economic approach.

This week, the Fed faces a delicate task. They want to pause the rate cuts but also show they will continue to make future decisions based on data. They need to avoid angering President Trump, who has been vocal about his wish for the Fed to reduce rates.

KPMG’s chief economist, Diane Swonk, explained that the Fed will likely aim to make as little news as possible while pausing the rate cuts. "It will be well televised," she said. Financial markets are predicting that there is more than a 99% chance the Fed will vote to keep interest rates between 4.25% and 4.50% on Wednesday, according to data from CME Group.

JP Morgan’s chief US economist, Michael Feroli, called the Fed's upcoming decision "a boring start to a tumultuous year for the Fed."
Trump’s Push for Lower Rates President Trump has often criticized the Fed, even though the central bank is meant to act independently to control inflation and unemployment. When Trump returned to office this week, he repeated his criticism of the Fed. On Thursday, he demanded that the Fed immediately lower interest rates and added that if they didn’t listen to him, he would "put in a strong statement" about it.

Trump went further, saying, "I think I know interest rates much better than they do. And I think I know certainly much better than the one who's primarily in charge of making that decision." His public criticism of the Fed and its chair, Jerome Powell, is unusual, as most past presidents have avoided speaking out against the institution.
KPMG’s Swonk said the Fed is unlikely to act based on the new administration’s demands. “The Fed will not front-run any policies by the new administration. They will wait and see how they play out and how they affect the economy,” she said.

Concerns About Tariffs and Inflation The Fed’s pause on rate cuts comes at a time when inflation has seen a small increase. At the same time, the labor market remains strong and the economy is still growing.

In December, the Fed updated its plans for 2025 and lowered the number of rate cuts expected to just two. Some policymakers have also started factoring in President Trump's economic policies into their forecasts.
Since Trump’s return to office, he has threatened to impose tariffs on trading partners like Mexico, Canada, and China. He has also said he would deport millions of workers and extend tax cuts. Trump wants to cut regulations on energy production as well. Many economists think these proposals could increase inflation, which might keep the Fed from cutting rates anytime soon.

However, not all economists agree with this view. Jim Bullard, from Purdue University, believes that the idea that tariffs will cause inflation is "overplayed." He pointed out that the first Trump administration’s economic growth didn’t come from the effects of tariffs, but from uncertainty surrounding them.

Bullard also mentioned that Trump’s administration could be more business-friendly and might reduce regulations, which could have a bigger impact on the economy.
In conclusion, the Fed is taking a cautious approach to rate cuts, weighing inflation, the labor market, and potential economic policies from the new Trump administration. The next few months will be important as the economy continues to evolve.

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