YaMarkets • 2025-01-29
The US Federal Reserve is all set to deliver its first interest rate decision since Donald Trump returned to the White House, and the stage is set for high volatility in FX markets. With the Fed expected to keep rates steady, a direct clash between the central bank and the president is brewing, one that could have far-reaching consequences for global markets.
Trump has wasted no time in making his stance on monetary policy clear, calling for deep and immediate rate cuts. His reasoning? A weaker dollar would boost US exports, fuel economic growth, and provide cheaper borrowing for businesses and households. However, the Fed, led by Chair Jerome Powell, has a different priority—keeping inflation under control.
Despite the cooling of price pressures, inflation is still above the Fed's 2% target. Powell and his team have managed to engineer a soft landing so far, cutting interest rates by a full percentage point last year without triggering a recession. But they remain cautious, unwilling to risk a resurgence in inflation by easing too aggressively.
Traders and analysts expect rates to be unchanged at 4.25%-4.5% in this meeting. The bigger question is how the central bank walks around Trump's demands. Any rate cut too soon would send the wrong signal, undermine the credibility of the Fed, and potentially stir up the fears of inflation.
Throughout history, central banks have been insulated from political influences to avoid mistakes in economic policies, which nations like Turkey understand all too well. If Powell were to yield to pressure, the Fed would suffer a reputation that it worked so hard to build, leading to fears of a White House-directed monetary policy rather than the economic facts of life.
Interestingly, the US is already on a slower rate-cutting path than the Eurozone. Markets now price in just a modest 50-basis-point cut from the Fed by 2025, while the European Central Bank (ECB) is widely expected to slice 100 basis points off the benchmark rate. This widening rate differential is thus likely to maintain the dollar on a strong run against the euro and other majors for now.
But risks abound. Policies enacted by Trump—the more they portend trade wars, fiscal stimulation, or deregulation—might create new sources of inflation pressure, pushing the Fed to delay cuts more than expected.
Powell should avoid any overt confrontation with Trump during his press conference following the meeting. Rather, he should be content with reading from the script: explaining that monetary policy decisions are fact-driven and not politically driven.
Yet questions linger. Can Powell continue to resist the pressure from the White House? Will Trump's policies make the Fed increasingly fearful of inflation? Most importantly, how will FX markets react to this high-profile power play?
For now, it remains in place, but it is under threat. The future direction for interest rates, and for the US dollar, will rest on the outcome of this fight, not just on numbers but on how things play out between Trump and the Fed over the next few months.
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