Berliner Boersenzeitung - US Fed prepares to pause in first rate decision since Trump's inauguration

The Fed cut its key lending rate by a full percentage point in the last four months of 2024 and indicated it would move more cautiously going forward amid an uptick in inflation away from its long-term target of two percent.

"I think they will do nothing, and I think they should do nothing," Jim Bullard, the long-serving former president of the St. Louis Fed, told AFP. "I think the committee's in very good shape right now."

The Fed's challenge this week is how to pause and communicate a data-dependent approach to future cuts without drawing the ire of the commander-in-chief, who has expressed his desire for rates to come down.

"The goal will be to make as least amount of news as possible as they pause, which is well televised," KPMG chief economist Diane Swonk said in an interview.

Financial markets saw a probability of more than 99 percent on Friday afternoon that the Fed would vote on Wednesday to hold interest rates at their current level of between 4.25 and 4.50 percent, according to data from CME Group.

"Next week should be a boring start to a tumultuous year for the Fed," JP Morgan chief US economist Michael Feroli wrote in a note to clients published Friday.

- Trump's 'demands' lower rates -

Trump has frequently criticized the Fed, which has a dual mandate from Congress to act independently to tackle inflation and unemployment. After returning to office on Monday, he renewed his attacks on the US central bank.

"I'll demand that interest rates drop immediately," the real estate mogul-turned president said Thursday, later adding that he would "put in a strong statement" if the Fed -- led by chair Jerome Powell -- did not listen to 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."

Trump's public criticism of the Fed and Powell -- whom he first nominated to run the US central bank -- is unusual, and runs counter to the policy pursued by most recent presidents of avoiding public criticism of the institution and its policymakers while in office.

"The Fed will not front-run any policies by the new administration," Swonk from KPMG said of the bank's upcoming rate decision. "They will wait and see how they play out and how they actually affect the economy."

- Tariff inflation concerns 'overplayed' -

The Fed's expected pause comes against the backdrop of a small uptick in inflation, with a relatively robust labor market and strong economic growth.

In December, Fed policymakers dialed back the number of rate cuts they expect in 2025 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.

Since returning to office on Monday, President Trump has revived his threats to impose tariffs on US trading partners including Mexico, Canada and China, and to deport millions of workers. He has also said he wants to extend expiring tax cuts, and cut red tape on energy production.

Many economists see Trump's tariffs and immigration proposals as inflationary, potentially keeping the Fed on pause for longer if they come into effect.

But this is not a universally held view.

"I think the story that tariffs are inflationary is overplayed in financial markets," said Jim Bullard, who is the Dr. Samuel R. Allen Dean of the Mitch Daniels School of Business at Purdue University. "We have seen this movie before: We had the first Trump administration."

"The (economic) growth effects are actually the ones to worry about, and most of those are coming through the uncertainty channel and not through the actual effects of actual tariffs," he added.

"I do think that this will be more business-friendly administration, and they may be able to do some stuff on the deregulation side," he said. "So that's probably the thing could have the biggest impact."

(A.Lehmann--BBZ)