Fed expected to pause rate cuts as it begins to weigh Trump policies

Donald Trump’s return to the White House is overshadowing the Federal Reserve’s meeting this week, as policymakers begin to grapple with the way the president’s policies on trade, immigration and spending could reshape the economy and potentially stoke inflation.

Already, the Fed has adopted a more cautious posture on interest rates, signaling just two rate cuts this year and a likely pause at this week’s meeting, the first in 2025. That is down from four projected cuts that Fed officials anticipated before the election.

The caution is fueled at least partly by uncertainty over the way Trump could enact new policies, such as a return to an aggressive and unpredictable global trade overhaul with threats to impose significant tariffs on U.S. trading partners. Some Fed officials have already begun to factor these policies into their economic projections, Federal Reserve Board Chair Jerome H. Powell said last month.

In addition to potential tariffs, Trump’s calls for lower immigration, fresh tax cuts and regulatory easing represent major structural shifts to the economy, said Robert Kaplan, a former president of the Federal Reserve Bank of Dallas.

“This is a complicated puzzle,” said Kaplan, now vice chairman of Goldman Sachs. “It would be wise to take some time to allow these structural shifts to be announced, to unfold and then to assess what impact they have on the underlying economy.”

After raising interest rates at a rapid clip to tackle shockingly high inflation, the Fed kept rates elevated for about a year before it began to lower them in September to shore up a softening labor market. In total, it cut rates a full percentage point in its final three policy meetings of 2024.

Now, inflation remains stubbornly elevated, hovering above the Fed’s 2% goal, though there are signs it continues to slowly cool. Underlying inflation that strips out volatile food and energy prices eased down in December’s consumer price index. Price increases for housing, one of the biggest components of the index, are also beginning to ease.

Private-sector data on rent suggests that the easing of housing inflation will continue for the next year, said Ernie Tedeschi, of the Budget Lab at Yale, a nonpartisan research center.

“Absent any upward effects from immigration or tariffs, I’m confident that inflation is on a glide path back to 2%,” he said.

Trump himself weighed in last week, saying he expects that steps by his administration to reduce energy prices would make it possible to keep inflation in check and to lower interest rates.

“I’d like to see oil prices come down, and when the energy comes down, that’s going to knock out a lot of the inflation,” he told reporters Thursday in the Oval Office. “That’s going to automatically bring the interest rates down.”

He also said he understands interest-rate policy better than the Fed and Powell and would speak to the Fed chairman at “the right time.”

“I think I know interest rates much better than they do, and I think I know it certainly much better than the one who’s primarily in charge of making that decision,” he said. “If I disagree, I will let it be known.”

Earlier in the day, he spoke in a video address to the World Economic Forum in Davos, Switzerland, where he said he would pressure Saudi Arabia to lower oil prices. He also said he would “demand” lower interest rates from the Fed.

The remark represented an early salvo in what might prove a major confrontation between the newly returned president and Powell. During Trump’s first term, he proved repeatedly willing to publicly cajole Powell — whom he originally appointed as chair — over interest rates, provoking criticism from Democrats and other economists.

A spokeswoman for the Fed declined to comment.

At present, the Fed’s benchmark short-term rate, which trickles through the financial system to influence what millions of consumers and businesses pay to borrow money, sits at 4.25 to 4.5%.

Despite consecutive Fed cuts, longer-term interest rates for government borrowing and even for consumer mortgages have risen, partly reflecting expectations of a stronger economy going forward.

Trump has limited ways to influence Fed policy beyond jawboning in public. At present, there are no vacancies on its seven-member board in Washington. Earlier this month, Michael Barr, the Fed’s vice chairman for supervision and a Biden appointee, said he would step down early as the government’s most influential policymaker on Wall Street. He plans to remain on the central bank’s board, at least for now.

The president’s earliest opportunity to put his stamp on the board’s composition may not arrive until next January, when the term expires for another sitting governor, Adriana Kugler. Powell’s term as chairman expires in May 2026, but he could remain on the board until early 2028.

Meanwhile, the last time the Fed had to grapple with a Trump-led trade war, its economists estimated that the project largely backfired. A study found tariffs designed to protect U.S. manufacturers led to job losses and higher prices. That was particularly true of businesses that use aluminum and steel subject to tariffs during the first Trump administration.