US Fed expected to hold rate steady despite Trump pressure to cut
WASHINGTON: After three consecutive interest rate cuts, the US Federal Reserve is anticipated to take a breather on Wednesday and signal it will remain on pause until the data changes, despite pressure from President Donald Trump to cut rates further.
Analysts predict the Fed will maintain its current stance this week as it waits to see which policies the new Trump administration will implement and how they might impact the US economy.
"I think the Fed sits on its hands," Moody's Analytics chief economist Mark Zandi told AFP. "Until there's more clarity — or any kind of clarity — around the economic policies of the Trump administration, the Fed is going to be reluctant to move," he added.
The US central bank has a dual mandate from Congress to address both inflation and unemployment, primarily by adjusting its benchmark short-term lending rate, which influences borrowing costs for consumers and businesses.
The US economy is performing relatively well, with robust growth, a mostly healthy labour market, and relatively low inflation, which remains slightly above the Fed's long-term target of 2%. The Fed's rate-setting Federal Open Market Committee (FOMC) voted to lower its key lending rate by a full percentage point between September and December 2024, bringing it to between 4.25% and 4.5%.
Futures traders overwhelmingly expect the Fed to remain on pause this month, assigning a probability of close to 70% that it will extend its hold at the next rate meeting in March, according to data from CME Group.
Since returning to office on January 20, Trump has revived his threats to impose sweeping tariffs on US trading partners as soon as this weekend and to deport millions of undocumented workers. He has also expressed a desire to extend expiring tax cuts and reduce red tape on energy production.
Last week, Trump renewed his criticism of the Fed and its chair, Jerome Powell, whom he appointed to lead the US central bank. "I'll demand that interest rates drop immediately," he said, later adding that he would "put in a strong statement" if the Fed did not consider his views. "I think I know interest rates much better than they do," he added. "And I think I know certainly much better than the one who's primarily in charge of making that decision."
Most economists expect Trump's tariff and immigration policies to be at least mildly inflationary, raising the cost of goods for consumers. "I think those policies are definitively inflationary, it's just a question of what degree," said Zandi from Moody's Analytics. "A big part of the Fed's job in calibrating monetary policy is responding to what lawmakers are doing, and if they can't get a fix on what they're doing, then that just argues for no change in policy, either higher or lower rates," he added.
At the Fed's previous meeting, policymakers also reduced the number of rate cuts they expect this year to a median of just two, with some incorporating assumptions about Trump's likely economic policies into their forecasts, according to minutes of the meeting.
Given the uncertainty, analysts are now divided over how many rate cuts they expect the Fed to make this year. In a recent investor note, economists at Goldman Sachs said their baseline forecast was for two quarter-point cuts, assuming a mild, one-time effect on inflation, "causing it to fall by less but not to rise and leaving the door open to rate cuts." "We retain our baseline that the FOMC will cut rates 25 basis points this year, in June," economists at Barclays wrote, pointing to the underlying strength of the economy.
Zandi from Moody's Analytics also expects two rate cuts later in the year. However, he added, "there are meaningful odds that the next move by the Fed may not be a rate cut; it might be a rate increase."
By RSS/AFP
