US Federal Reserve Pauses Rates Angering Trump

Uncertainty Still Persists on Trump Tariffs

The U.S. economy grew by 2.5% last year, driven by strong consumer spending, although this rate was slightly lower than the previous year’s 3.2%. Despite economic challenges and high inflation, the job market remained robust. The Federal Reserve has kept interest rates steady, with future growth expected at a slower pace. Consumer spending rose significantly in the fourth quarter, but business investment and inventory restocking were weaker areas. Inflation showed signs of cooling, yet concerns over higher prices and consumer confidence persist into 2025.

In addition, the FED is still cautious and waiting to see the magnitude of potential Trump tariffs and how this impacts inflation. Trump is using these as a negotiating tool but things could escalate especially with China.

Trump attacked the FED for not cutting rates. This is a real problem in questioning the independence of the US central bank. It is not the first time he has done this. It also happened during his first term.

We continue to see only one or two rate cuts for this year. Thus, the policy rate is forecast to be cut to around 4 %.

Key Points

• U.S. GDP grew by 2.5% last year, mainly due to strong consumer spending.
• The job market remained strong despite high inflation and economic challenges.
• The Federal Reserve kept interest rates steady, with slower growth expected.
• Consumer spending rose 4.2% in the fourth quarter, but business investment declined.
• Inflation showed signs of cooling, but consumer confidence and high prices remain concerns.

Economic Outlook

Looking ahead, economists predict that the U.S. economy will experience moderate growth. Several factors could influence this trajectory, including:

Inflation Management: While inflation has shown signs of cooling, it remains a critical concern. The Federal Reserve may adjust interest rates to ensure inflation rates do not rise again, balancing economic growth with price stability.  A big uncertainty to inflation forecasts is the magnitude and timing of tariffs.

Global Economic Conditions: International trade dynamics and geopolitical events can impact the U.S. economy. Changes in trade policies or conflicts can affect export levels and import costs, influencing domestic economic health. The big risk here is a tariff war with China in particular.

Consumer Confidence: Consumer confidence plays a vital role in sustaining economic growth. If consumers feel optimistic about their financial situation and the broader economy, spending is likely to continue driving growth. Conversely, uncertainty may lead to reduced spending and saving behavior.

Labor Market Dynamics: The strong labor market has supported consumer spending through increasing wages and employment levels. However, challenges such as skill mismatches, automation, and demographic shifts could impact future job creation and wage growth.

Technological Advancements: Innovation continues to be a significant driver of economic growth. Investments in technology and infrastructure can enhance productivity and efficiency, potentially leading to new industries and job opportunities.