With Trump in Office, What’s the US Fed’s Next Move?

Looming over the outlook are the potential impacts of new Trump administration policies. Analysts say tariffs and tighter immigration rules could exacerbate price pressures. But looser regulations and a more protectionist economic agenda could also spur growth in the United States. Without clarity on those questions, analysts say it makes sense for the Fed to take a breather.

Fed Likely to Hold in January

After holding rates at their peak of 5.25%-5.50% for much of 2024, the Fed kicked off its most recent easing cycle with a jumbo half-percentage-point cut in September. The central bank cited its increasing confidence in inflation’s downward trajectory and a cooling but healthy jobs market. That cut was followed by two more 0.25% cuts in October and November.

The Fed hit the pause button in December after progress on inflation appeared to slow in the fall. With the job market still strong and the economy still growing, central bank officials have said they have room to slow down the pace of easing in the months ahead.

Many economists agree. “We’ve had good economic data, so it’s hard to argue that the economy needs lower rates,” says James Ragan, director of wealth management research at DA Davidson. “There seems to be a real strong argument for pausing here.” He adds that Fed officials are also concerned about making a policy mistake. Cutting rates too much too soon could juice the economy and make it even more difficult to bring inflation back down to target.

“They can be patient,” says Paul Mielczarski, head of global macro strategy at Brandywine Global. He says the 100 basis points of cuts in 2024 helped create some wiggle room for the central bank to wait for more economic data and clarity from Washington. “They can assess the evolution of economic growth and inflation, but more importantly, they can assess policy changes under the new Trump administration and their impact.”

Will Trump’s Policies Fuel Inflation?

There’s an active debate on Wall Street about how much any new tariffs and other protectionist policies will worsen price pressures. “Everybody seems to think tariffs are going to be inflationary, but some think they might be a little inflationary but not enough for the Fed to worry about,” explains Eric Merlis, managing director and co-head of global markets at Citizens.

While Federal Reserve chair Jerome Powell has been adamant that the Fed will not make interest rate decisions based on policies that have not yet been enacted, the question is still top of mind for some central bankers, as shown by minutes from the Fed’s December meeting. “Almost all participants judged that upside risks to the inflation outlook had increased,” the minutes read. “As reasons for this judgment, participants cited recent stronger-than-expected readings on inflation and the likely effects of potential changes in trade and immigration policy.” Policymakers also agreed that the Fed was “at or near the point at which it would be appropriate to slow the pace of policy easing.”

Are Interest Rates Still Restrictive?

Outside of politics, market watchers are also watching whether rates can still be considered “restrictive”—whether they are high enough to put downward pressure on inflation and economic growth. On the other side of the spectrum are “accommodative” interest rates, which are low enough to boost economic growth and support the labor market. Over the long term, the Fed aims to find a balance here. Even after 100 basis points of cuts, Powell described rates as “meaningfully restrictive” in December—an assessment that is generally shared by Wall Street.

But the data may be telling a slightly different story. “If you look at how the economy and financial markets are performing, you don’t get the impression that current rates are particularly high,” Mielczarski explains. Still, he notes that the Fed is unlikely to signal that rates are moving towards accommodative at January’s meeting.

Merlis adds that policy tightening likely won’t be on the table until there’s more agreement that rates are accommodative, and the Fed doesn’t believe we’re there yet.

What to Expect from the Fed in 2025

While the central bank might be in wait-and-see mode this month, the rest of the year is a bigger question. Generally, investors and analysts expect one or two quarter-point rate cuts. “The bias is still for rates to move slightly lower,” says Mielczarski.

Bond futures markets aren’t pricing a significant chance of a first cut happening until at least June, according to the CME FedWatch Tool, but it could come earlier. Morningstar chief US economist Preston Caldwell expects the Fed to skip a rate cut at its January meeting, then cut at every other meeting beginning in March.

Economists and Fed officials say it all depends on the data, which will bring more clarity over the coming weeks. “Powell and the Fed have an opportunity in the next couple of months to gear up for the March meeting,” says Merlis. He points out that disruptions from the hurricanes last fall will be behind us, although the impact of recent fires in California is still unclear.

“If they wait for more data, they can maybe make a more informed decision down the road,” says Ragan, who adds that significantly softer inflation data could prompt a cut as soon as March, though that’s not his base case. Rate hikes are also not the base case for most analysts, though a significant uptick in inflation could tip the balance that way.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.