In its first key decision after the start of Donald Trump‘s second term, the Federal Reserve (Fed) opted to keep interest rates in a range of 4.25% to 4.5%. This measure responds to the need to monitor the evolution of inflation, which in recent months has shown signs of stagnation.
Interest Rates: Clash Between the Fed and the Trump Administration
The president has insisted on the need to cut rates to stimulate growth, but the Fed has maintained its autonomy, ensuring that its decisions are based on economic data. The lack of an interest rate cut could increase tensions between Trump and the central bank. This, in a context where the government’s economic policies generate uncertainty.
Inflationary Risks and the Fed’s Role
While the Fed remains confident that inflation will fall to 2%, some factors could complicate the outlook. Economists warn that Trump‘s intention to impose 25% tariffs on Mexico and Canada. Along with his policies of mass deportation and his boost to oil production, could lead to higher prices and delay the stability objective.
If the new tariffs take effect on 1 February, the central bank may be forced to reconsider its stance. While some investors still expect rate cuts this year, the possibility of the Fed maintaining or even raising rates remains a possibility.
The Impact of Trump’s Economic Strategy
In fact, the administration’s policies, which include deregulation, extended tax cuts and immigration restrictions, could alter the labour market and affect the broader economy. The Fed, which bases its decisions on hard data, will need to carefully assess how to respond to these changes.
Following the imposition of tariffs in 2018, the Fed ran simulations to anticipate different economic scenarios. In most cases, it chose to leave rates unchanged immediately, assuming that price adjustments would be temporary. However, if trade retaliation from other countries leads to a sustained increase in inflation, the central bank may be forced to raise rates to control the impact.
For now, markets expect the Fed to hold borrowing costs steady in March. Although that outlook could change if economic data show an accelerating decline in inflation in the first few months of the year.
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