December 18-19: Federal Reserve's Rate Decision and Trump's Tariffs
Fed Reserve to Temporarily Halt Operations
The odds are high that the US Federal Reserve will slash interest rates by another 25 basis points next week, making it the third consecutive cut. However, this move might be the last one before a brief pause due to the forthcoming change in government in 2025.
Here's what you need to know:
The Upcoming Interest Rate Cut
Economists are positive that the Federal Open Market Committee (FOMC) will lower the federal funds rate to a target range of 4.25%-4.5% on December 18-19. The 95% probability of this decision comes from the Fed Watch Tool from CME Group, which bases its prediction on the release of the November Consumer Price Index (CPI). The CPI stood at 2.7% annually and 3.3% for the core rate, suggesting an inflationary pressure.
The Role of Donald Trump's Tariffs
The new presidential administration, led by Donald Trump, could pose a challenge to the Fed's monetary policy. Trump's proposed tariffs could set off inflation as the cost of imported goods increases, potentially canceling out the benefits of easing monetary policy.
The expected import tariffs could increase core inflation measures by approximately 2.25% over the following year, taking the annual core Personal Consumption Expenditures (PCE) price index to around 3% by the end of 2025 [3]. This would be the highest level since 2023.
The Impact on Consumers and the Economy
The rise in inflation would affect consumer prices, potentially reducing their purchasing power, especially in a weakening labor market [3]. The auto sector could face an average price increase of up to 11.4% for U.S. light vehicles due to specific tariffs on autos and auto parts [5]. Additionally, the new tariffs could slow down global trade and impact the U.S. GDP, reducing economic growth by about 0.2 percentage points [4][5].
A Balancing Act for the Fed
The Fed faces a delicate challenge in managing inflation while ensuring economic growth. The potential inflation rise due to tariffs could force the Fed to increase interest rates, cooling down the economy even more [3][5].
In conclusion, the tariffs could push inflation up, testing the Federal Reserve's ability to balance inflation control with economic growth. As we move forward, it'll be crucial to monitor the interactions between the new administration, the Federal Reserve, and the overall economy.
Source:
- Peter De Thier, Washington
- Federal Reserve
- Economists' forecasts
- Brookings Institution
- International Trade Commission
- The Federal Open Market Committee (FOMC) is expected to ease tariffs by lowering the federal funds rate, potentially reaching a target range of 4.25%-4.5% in the upcoming December 18-19 meeting.
- The average consumer price increase due to proposed tariffs could reach up to 11.4% for U.S. light vehicles, while the overall inflation could rise to around 3% by the end of 2025, as per economists' forecasts.
- The new presidential administration, led by Donald Trump, could present a challenge to the Fed's monetary policy, as Trump's tariffs could set off inflation and potentially cancel out the benefits of easing monetary policy.
- The Federal Reserve faces a delicate balancing act in managing inflation while ensuring economic growth, as potential inflation rise due to tariffs could force the Fed to increase interest rates and potentially slow down the economy.
- The federal funds rate cut and the impact of Trump's tariffs on inflation, consumer prices, and economic growth will be important topics in general news, politics, finance, and business discussions in the coming months.
