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Fed to Hold Rates Steady as Trump’s Policies Add Uncertainty

Quiver Editor

The Federal Reserve is widely expected to hold interest rates steady on Wednesday as policymakers assess inflation trends and the potential economic impacts of President Donald Trump’s policies. The central bank, which cut rates by a full percentage point in late 2024, remains cautious amid persistent price pressures and uncertainty over Trump’s fiscal and trade agenda. Investors and economists expect the Fed to eventually resume rate cuts, but officials have signaled that they need more clarity before making their next move.

Trump’s latest actions—including a proposed federal spending freeze and the threat of 25% tariffs on imports from Mexico and Canada—have added further complexity to the Fed’s outlook. Preliminary data released Wednesday showed a record $122.1 billion U.S. goods trade deficit in December, as businesses appeared to front-run potential new trade restrictions. Meanwhile, the bond market has reflected investor skepticism about both inflation control and future rate cuts, with longer-term yields rising sharply since September.

Market Overview:
  • Fed expected to keep rates steady amid policy uncertainty.
  • Trump’s fiscal and trade policies introduce economic risks.
  • Bond market signals skepticism about inflation control.
Key Points:
  • Fed cut rates by a full percentage point in late 2024.
  • Trade deficit surged in December as firms reacted to tariff threats.
  • Trump administration’s economic policies remain a wildcard for inflation.
Looking Ahead:
  • Investors anticipate rate cuts later in 2025, possibly starting in June.
  • Fed Chair Powell likely to be pressed on Trump’s rate demands.
  • Inflation data and upcoming fiscal decisions will shape future Fed moves.
Bull Case:
  • The Federal Reserve’s decision to hold interest rates steady at 4.25%-4.50% reflects confidence in stabilizing inflation trends, providing a foundation for economic growth without risking overheating.
  • President Trump’s deregulatory and pro-business policies, including potential tax cuts, could spur economic activity, supporting the Fed’s cautious approach to rate adjustments.
  • The disinversion of the yield curve and rising commercial loan activity signal improved conditions for bank profitability and broader economic resilience.
  • Investors anticipate rate cuts later in 2025, which could provide relief to borrowers and boost consumer spending if inflationary pressures remain under control.
  • The Fed’s patience allows for more clarity on the economic impacts of Trump’s fiscal and trade policies, reducing the risk of premature monetary policy shifts.
Bear Case:
  • Persistent inflation above the Fed’s 2% target, coupled with uncertainty around Trump’s proposed tariffs and fiscal policies, could complicate the central bank’s ability to maintain its current stance without risking higher price pressures.
  • The record $122.1 billion U.S. goods trade deficit in December highlights vulnerabilities in the economy, potentially exacerbated by Trump’s threats of 25% tariffs on imports from Mexico and Canada.
  • Rising long-term bond yields reflect investor skepticism about the Fed’s ability to control inflation while balancing growth, increasing borrowing costs for businesses and consumers.
  • Trump’s public criticism of the Fed and calls for immediate rate cuts could undermine market confidence in the central bank’s independence and decision-making process.
  • Delays in addressing inflation risks or premature rate cuts later in 2025 could destabilize financial markets and erode progress made in controlling price growth over the past year.

While the Fed has expressed confidence in inflation’s gradual return to its 2% target, officials remain wary of unexpected shocks that could alter their path. Data set for release Friday is expected to show the Personal Consumption Expenditures Price Index hovering near that threshold, reinforcing the view that price growth is stabilizing. However, the Fed’s response will hinge on how Trump’s trade and fiscal policies influence broader economic conditions.

Policymakers are particularly attuned to Trump’s historically fraught relationship with the Fed, as he has openly pressured the central bank to cut rates more aggressively. For now, officials are signaling patience, with a preference to hold steady rather than risk reversing course if inflation flares up again. Investors, meanwhile, are betting that the Fed will wait until at least June before considering further rate reductions.

About the Author

David Love is an editor at Quiver Quantitative, with a focus on global markets and breaking news. Prior to joining Quiver, David was the CEO of Winter Haven Capital.

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