Fed to Hold Rates Amid Trade Policy Uncertainty
Key Points:
* Fed widely expected to maintain interest rates at Wednesday's policy meeting.
* Chair Powell faces pressure from President Trump to cut rates further.
* Concerns about trade policy impacting inflation remain.
* Fed officials cautious about inflation signs, reducing rate cut expectations.
* Friday's PCE inflation data could influence Fed's stance.
* Some economists suggest a potential rate hike this year is not unlikely.
Overview:
Investors anticipate a steady interest rate decision from the Federal Reserve on Wednesday. The central bank is expected to hold rates following three consecutive cuts in 2024. However, uncertainty surrounds Fed Chair Jerome Powell's press conference, where he will address the potential impact of President Trump's trade policies on monetary policy.
President Trump has threatened tariffs on Mexico, Canada, and China, raising concerns about upward pressure on inflation. Trump has also publicly called for further rate cuts, setting up a potential clash with Powell.
Economists predict that Powell will cautious in his comments, indicating that Fed members are evaluating trade policy implications while emphasizing the limited scope of the meeting's decisions. In December, Fed officials acknowledged increased inflation risks due to trade and immigration policies.
Recent Fed statements indicate a cautious approach regarding inflation, with officials reducing predicted rate cuts for 2025. Inflation data for December showed slight progress but remains elevated.
The PCE index, the Fed's preferred inflation gauge, is expected to remain unchanged in December. Economists forecast a modest increase in core PCE. Some analysts now suggest a potential rate hike this year could be necessary.
Fed's policy decision will be announced at 2 p.m. ET, followed by Powell's press conference at 2:30 p.m. ET.