Fed to hold interest rates steady as Trump calls for lowering borrowing costs

The U.S. Federal Reserve (Fed) is expected to hold interest rates steady after its meeting this week on January 28-29, marking the first pause in the rate-cutting cycle that began last September. Meanwhile, President Donald Trump's decisions, including his demand for the Fed to continue lowering borrowing costs, could significantly impact the economy this year.

Trump has previously sparked economic concerns by calling for restrictions on immigration and higher import taxes. Last Thursday, he told global business leaders at the World Economic Forum in Davos, Switzerland, that he would ask the Fed to lower interest rates. "I will be asking for interest rate cuts, and likewise, interest rates all over the world should be coming down," he said.

Since the Fed's December meeting, data shows that Fed officials generally believe inflation will continue to steadily move towards the 2% target, while unemployment remains low, with continued job and economic growth. Markets anticipate that the Fed may lower borrowing costs twice by the end of this year, given the inflationary pressures that have emerged since President Trump took office.

Trump's policies are likely to influence the Fed's future policy decisions. After inflation soared to a 40-year high in 2022, the Fed has successfully brought inflation down to around its 2% target. Having lowered its benchmark interest rate by a full percentage point last year, the Fed will meet on Tuesday and Wednesday, with policymakers likely to keep it at its current range of 4.25%-4.50%.

According to the CME FedWatch Tool, traders are pricing in only a 0.5% chance that the Fed will cut rates to a range of 4.00%-4.25% this week. For the March meeting, that probability rises to 38.1%, and to 45.8% for the Fed's May meeting.

Recent data shows that U.S. producer prices rose moderately in December. The U.S. Bureau of Labor Statistics reported that the producer price index, which measures wholesale inflation, increased by 0.2% in December, while the core measure was unchanged for the month. This follows the release of an upbeat monthly jobs report. However, this data is unlikely to change the Fed's view that it will not cut rates again until the second half of the year, as the labor market remains resilient.

The easing of underlying U.S. inflation has rekindled hopes that the Fed will adopt a less restrictive policy this year. Core inflation slowed unexpectedly, while overall consumer prices did not show a significant upside surprise. The U.S. Bureau of Labor Statistics reported that the overall CPI rose 0.4% in December, accelerating to 2.9% annually from 2.7% the previous month. Meanwhile, core inflation, which excludes volatile food and energy prices, rose 3.2% year-on-year, compared with a 3.3% increase in November.

Minutes from the Fed's December meeting showed that officials were concerned that the Trump administration's protectionist and expansionary policies could trigger inflationary pressures. Trump said on Friday that his conversations with Chinese President Xi Jinping were friendly, that he could reach a trade agreement with China, and that he would rather not use tariffs. This eased concerns that Trump's protectionist policies could push up inflation and supported the prospect of further Fed rate cuts.

Trump has previously proposed tariffs of up to 10% on global imports, 60% on Chinese goods, and a 25% increase in import duties on products from Canada and Mexico. He has also vowed to impose tariffs on the EU and said his administration was discussing imposing a 10% tariff on goods imported from China starting February 1.

Furthermore, the U.S. and Colombia averted a trade war after the White House said on Monday that Colombia had agreed to accept military planes carrying deported migrants. This came after Trump had ordered his administration to impose an emergency 25% tariff on all goods from Colombia, due to the Colombian government's refusal to allow two U.S. military planes carrying deported migrants to land in the country. Trump also warned that tariffs would increase to 50% next week if the Latin American country refused to comply with his immigration policies, adding to concerns about a trade war and dampening investor appetite for riskier assets.