The Federal Reserve’s last meeting of the year has come as a whirlwind for the markets. The US central bank has changed its policies, eliminating two rate cuts in 2025 from its roadmap, and leaving only two cuts of 25 basis points for all of next year. In Donald Trump’s previous presidential term there was already friction between Jerome Powell and the Republican president for not lowering interest rates, and now history may repeat itself. However, the Fed can claim that its decision has to do with Trump’s own electoral promises, which threaten to increase inflation again, so its decision is a necessary counterweight to try to maintain balance. In fact, the economic projections of several Fed members have been based, in part, on the increase in inflation anticipated by the measures that the new administration is expected to implement. There are already analysis houses, such as Bank of America, which They open the door to the rate cut cycle having already ended.
Jerome Powell’s speech at the Federal Reserve meeting this Wednesday has taken a turn in several ways. One of the most significant has to do with the inclusion of the economic impact of the policies that the new US Government may take in 2025. In November, Powell was very insistent that the possible policies of the Trump administration would not be included in the economic projections of the Fed until these were officially confirmed and implemented. However, the president of the central bank has changed his speech in December, and now admits that there have been several members of the central bank who have included in their projections, and, therefore, in their decision on rates, the impact of the measures that they expect Trump to take.
The Fed and the Trump administration have become the yin and yang for the US economyeven before the new president’s term officially begins. One balances the other, and vice versa. On the one hand, the promised tariffs, the expulsion of immigrants and the stimulus measures that the government has included in its presidential campaign will be a source of inflation, and on the other, the Fed has the mandate to keep it under control. The central bank’s message at this Wednesday’s meeting recognizes the need to cool economic growth to avoid inflationary scares.
This positioning of the Fed indicates that in the coming months hostilities between the government and the central bank will be reactivated. While it is true that Trump will not want inflation to skyrocket, he will not want to see growth stagnate due to the Fed’s measures in the first months of his mandate, which opens the door to a new conflict, similar to the one he had place in 2019, between Powell and the American president.
The Fed’s approach changes in just 4 months
Powell’s change of speech this week confirms that the central bank has changed its approach to monetary policy. If in August the Fed announced that it would begin to be more focused on employment than on inflation, upon seeing that the labor market was beginning to deteriorate in the US, now, with signs of calm in unemployment, and inflation data that resist further moderation, the central bank’s approach has changed again.
“The Fed is now markedly hawkish, with only two rate cuts projected for 2025, and signaling growing concerns about persistent inflation, or a revival,” explains Daniel Siluk, head of liquidity and short duration at Janus Henderson. “The Fed appears to have shifted again, prioritizing inflationary risks over employment risks, preparing to skip the January rate cut and take an extended pause in 2025 if inflationary pressures persist and the economy remains robust,” Siluk confirms. .
Have they already been able to finish the rate cuts?
The fear of a new rise in inflation is not exclusive to the Fed. After this Wednesday’s meeting, there are already three analysis houses that, after reviewing their interest rate forecasts, already expect that the central bank will not move rates throughout next year. These are Berenberg, BNP Paribas and Deutsche Bank, according to the data published Bloomberg.
Others, such as Bank of America, still do not maintain this possibility as their base case, but they do admit that the risk of this occurring is increasingly higher. The US bank, in fact, blames Trump’s policies as the catalyst that has led the Fed to reduce its rate cut forecasts, and points to structural factors unrelated to Trump’s plans.
“We believe that if tariffs were the main reason for the rise in inflation, we would have expected to see a softer growth forecast for 2025. Powell himself does not appear to have taken tariffs into account, as he cited significant uncertainty about the extent , the timing and the impact of tariffs. We maintain our forecast of two more rate cuts next year, but the risks have clearly shifted in the direction of fewer (no) cuts,” the bank says. United States.
Be that as it may, it seems clear that, if Trump wants to see the Fed cutting rates, he will have to carefully measure the scope of some of his electoral promises, since, inevitably, these will create inflation. And it is not an idea from Powell: there are many experts who have been warning for months that the Fed would have difficulty lowering rates as it was projecting if Trump ended up landing in the White House.
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