The Federal Reserve (Fed) held interest rates at 4.25%-4.5% as Donald Trump’s tariff threats increase uncertainty and risk an renewed bout of inflation in the US.
The central bank downgraded its growth forecast amid rapidly changing trade policy, lowering its GDP expectations for 2025 from 2.1% to 1.7%.
Lindsay James, investment strategist at Quilter, said the Fed is likely to remain cautious until it has more clarity on how Trump’s potential trade war plays out.
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“Jerome Powell is flying somewhat blind given not only the extremity of the tariffs being announced by Donald Trump, but his willingness to U-turn at the last moment, making any attempt by businesses and the Fed to plan all but futile,” she added.
“Trump is desperate for rates to be cut but is likely to be left waiting given the need for calm heads in the current economic environment.”
Despite Trump’s desire to bring inflation down and cut rates, James said his tariff taxes on US importers could risk inflation “spiralling if the proposed economic policies continue”.
“Trump’s election campaign focused hard on bringing inflation down, but this is unlikely in the short-term,” she added. “This is happening at the same time as economic growth is expected to slow and the employment data looks marginally weaker.”
However, the Fed may have its hand forced even if inflation persists, according to Wealth Club investment manager Isaac Stell.
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He said Fed chair Powell may be compelled to reinject some confidence back into markets as consumers and businesses alike scale back.
“With such an unpredictable leader at the helm of the world’s largest economy, the scope for policy makers to make effective decisions diminishes with every new announcement,” Stell added.
“The decision to cuts rates further is likely to be finely balanced. Tariffs are likely to increase inflation, a reason to keep rates high, however, with consumer and business confidence plummeting and the DOGE slashing jobs, the Fed may feel it is has to step in to alleviate some of the pain by cutting rates to support growth.”
This story was written by our sister title, Portfolio Adviser
