Fed may take lot longer to cut rates

ISTANBUL

The Federal Reserve may delay rate cuts or even introduce rate hikes due to inflationary pressures stemming from President Donald Trump’s tariff threats, despite the strength of macroeconomic indicators, according to experts.

James Knightley, international chief economist at ING, told Anadolu that the Fed’s 100-basis-point rate cut last year set a high bar for further easing. He explained that additional rate cuts would require clear signs of economic weakness and lower inflation, but Trump’s policies complicate the outlook.

“Trump’s low corporate tax and light-touch regulation may be positive, but tight immigration policies pose threats to prices,” said Knightley, noting that these measures could delay the Fed’s next rate cut.

The Fed’s usual practice of waiting to incorporate government policy changes into forecasts until they are implemented is being tested. “With President Trump having just won re-election and his policy plans differing starkly from former President Joe Biden’s, Fed Chair Powell acknowledged some felt the need to factor in potential policy shifts earlier,” Knightley said.

He added that Trump’s tariff policies aim to boost US manufacturing competitiveness, but trade protectionism could drive up prices in the short term.

“Immigration controls could prompt labor shortages in sectors like agriculture and construction, adding to inflation pressures,” Knightley said. “Fed officials will likely need to see a marked slowdown in job creation and cooler inflation pressures to justify further rate cuts. That means no change to monetary policy is a certainty on Jan. 29, and our previous call for a March rate cut now looks unlikely.”

Knightley also highlighted the resistance to rate cuts from rising bond futures, which have increased consumer and corporate borrowing costs, and the strengthening US dollar.

Felix Schmidt, senior economist at Berenberg, echoed these concerns, describing the US economy as “robust,” with a stable labor market and core inflation that remains “too high.”

“On top of that, Donald Trump is back in the White House—his plans to loosen fiscal policy, impose extensive tariffs, and severely restrict immigration would be inflationary if implemented,” Schmidt said.