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Risk markets have effectively priced in the interest rate cuts that began late last year. However, conditions have altered, leading to increased fear as the market appears to be overpricing recent data. So, can the Fed genuinely raise rates this year? What are the predictions for 2025?
Economic Policy and Trust
Trump is appointing members from his party to lead almost all significant institutions, resulting in a management shift across the SEC, CFTC, various ministries, and more. However, he has not touched the Fed, which shows respect for the independence of the institution that designs monetary policy.
Trump will allow Powell to remain in his position until the end of his term, meaning not much will change for the Fed following Trump’s election. Regardless of who occupies that chair, whether Biden or Trump, the Fed will continue its operations.
Will There Be an Interest Rate Hike in 2025?
Trump’s presidency will bring changes in customs duties and immigration policy. The Fed has been working on various projections since November regarding these inflationary risks, but they cannot make definitive statements. So, will the current data motivate the Fed to abandon cuts and resume hikes?
No, especially with recent data suggesting that entering a rate-hiking pathway is not imminent. Such significant “U-turns” require a well-prepared foundation and timely market alerts.
Is there a precedent for this? The Fed cut rates in late 1998 due to potential risks posed by Long-Term Capital Management on the stock markets. After things stabilized, they resumed raising rates, which took seven months even in an economic environment shaken by the dot-com bubble.
Are we in a worse situation today than during the dot-com crisis? No, inflation has not significantly deviated from 2%. Therefore, if there is to be a rate hike this year, signals must be communicated by April or May, possibly requiring inflation to rise to compelling levels, around 5%.
Ed Al-Hussainy, a global interest rate strategist at Columbia Threadneedle Investments, notes that conditions are not yet ripe for the Fed to suggest interest rate hikes confidently.
If the Fed begins to discuss rate hikes with certainty, markets will quickly begin to price this in. It is a long process and not something that can be achieved in a few weeks. Thus, we will monitor employment, inflation, and PMI data to estimate where the economy is heading.
