Central bank has given little indication of its path ahead amid political and economic chaos
The Federal Reserve has stayed largely silent during a chaotic three weeks across the US marked by upheaval in the federal government, pledges of new American expansionism and threats of a trade war under Donald Trump’s second administration.
After hitting pause on interest rate cuts in its first decision of the year, the central bank isn’t scheduled to meet again until March 18-19 – and its rate plans don’t appear to have been altered, yet, by the sweeping changes enacted by President Trump in his opening weeks back in the White House.
While the president suggested he would put pressure on the Fed to bring rates lower and criticized what he described as its “terrible” track record on fighting inflation, decisionmakers seem committed to a more cautious approach.
Fed governor Michelle Bowman left the door open to more rate cuts later in the year in comments at a business summit at the end of January, but also highlighted continuing “upside risks” to inflation and said a gradual approach to rate reductions was necessary.
It’s not yet clear what impact the Trump administration’s policies will have on the US economy, although the stock market wobbled last week amid tariff fears and a huge cull of federal agencies and government programs.
But for now, the central bank’s wait-and-see approach looks to be continuing as it weighs up which of Trump’s flurry of policy proposals takes effect – and whether tariffs on Mexico and Canada, promised last week but delayed for 30 days, actually arrive.
“There a lot of things being said, a lot of proposals being floated, but it’s not clear what the final outcomes would be from those and they certainly are not going to take pre-emptive action on an idea that is being floated,” Shelly Antoniewicz (pictured top), chief economist at the Investment Company Institute (ICI), told Mortgage Professional America.
“They want to actually wait and see what’s the end result of some policy that’s gone through the process and has been finalized or will be implemented.”
War on inflation to continue in 2025
Central to the Fed’s deliberations on whether the Trump administration’s policies are having a detrimental impact on the economy will be, unsurprisingly, inflation.
Trump’s threats to impose 25% tariffs on all imports from Mexico and Canada (except Canadian energy, tariffed at 10%) have stoked fears of a potential inflationary backlash if higher costs are passed along to consumers.
Mat Ishbia shares the positive outlook for the mortgage industry under Trump’s new administration. He highlights the importance of innovation and aligning Fannie and Freddie with the industry's mission to make homes affordable for all.https://t.co/pgqI4oJuA8
— Mortgage Professional America Magazine (@MPAMagazineUS) February 5, 2025
“Inflation is going to be the key factor they’re going to look at, particularly if tariffs go into place, and if there are reciprocal tariffs they’ll be looking at the potential estimate for inflation,” Antoniewicz said. “It could be a one-time bump up in prices – so if we’ve got no escalating tariffs but just a one-time bump in tariffs, you get a one-time bump in prices. We’d see a big increase in inflation if that happens in that period.
“But then if it levels off from there, it shouldn’t have any future effects. If, however, there’s things that are going to happen where we’re going to have to bring things back – production changes, movement of capital to the US - there’s then going to have to potentially be higher costs that are going to feed through.”
Potential trade war remains the biggest imponderable for US economy
Financial markets have already priced in that the Fed means business on bringing inflation down squarely to 2%, with market participants only expecting two 25-basis-point cuts throughout 2025 and only one reduction in 2026.
Only severe negative macroeconomic effects from Trump’s policies would be likely to move it off that path, Antoniewicz said – such as a huge hit to payroll employment in the US if a trade war escalates.
Whether or not those tariffs will come into effect are anybody’s guess, although the president has also vowed to introduce additional measures on steel and aluminum imports.
“We saw [last week] that the markets reacted very negatively because the 25% across-the-board tariffs being put in place for Mexico and Canada [came close to being introduced],” she said. “And that impacts a lot of goods that come into the United States.
“It would have repercussions on the macroeconomy, on inflation, and all three countries. It’s not easy for US manufacturers or producers to change their supply chains on a dime. They cannot do that.”
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