Moneycontrol Pro Panorama | As the Fed pauses, the world watches

Fed Chairperson Jay Powell’s remarks conveyed a unanimous change in sentiment among the Fed members.

Dear Reader,

After three straight meetings when the US Federal Reserve (Fed) cut rates by a cumulative one percentage point since September, it decided to take a breather. Rates were unchanged in what was the first Fed meet in 2025 and also the first under the new political regime since President Donald Trump assumed office.

Simply speaking, the change in stance can be viewed as a wait-and-watch decision when a new government takes charge and announces policies.  An ideal scenario, one that financial markets would cheer, would have been if policy continuity was visible under a new political regime.

Fed Chairperson Jay Powell’s remarks, however, conveyed a unanimous change in sentiment among the Fed members. The confidence that inflation was progressing along the glide path to the targeted 2 percent turned into cautiousness as the Fed took a more hawkish assessment of inflation that it “remains somewhat elevated”.

What changed in just a month? The Trump factor? To be fair to Powell, the impact of rate cuts may take a while to have the desired impact on the job market and inflation. A healthy job market and stubborn inflation typically would imply fewer Fed rate cuts in the coming months. Rates would remain higher for longer.

But Trump’s sweeping remarks since he assumed office have been a spanner in the works. There is no debating that Trump’s statements indicating an era of high tariffs, tax cuts, tight immigration laws and mass deportations could change the contours of international trade and perhaps fuel higher prices. Importantly, Powell and the Fed must account for a period of uncertainty ahead. Nothing is known about Trump’s economic policy plans beyond some broad priorities, a few provocative actions, and a lot of hot rhetoric, says Robert Armstrong in his column ‘Unhedged’ in FT.

Besides, it is too early to assess the impact of such policies and likely retaliatory measures by other countries on global trade and inflation. There is an overriding concern regarding tariffs, says Anubhav Sahu from MC Pro Research, given the number of countries involved.

Meanwhile, Trumponomics is expected to trigger varied reactions from different countries. Bank of Canada, for instance, took pre-emptive steps, trimmed its key policy rate by 25 basis points to 3 percent, cut growth forecasts and also warned Canadians that a tariff war triggered by the United States could cause major economic damage. Noting a hypothetical scenario, the bank said in its monetary policy report that if Canada and other nations slapped a retaliatory 25 percent tariff on the United States, this could cut Canadian growth by 2.5 percentage points in the first year and another 1.5 percentage points in the second year (Read here).

Besides US and Trump’s policy rhetoric, inflation continues to stoke rate hikes in some countries. Japan has been hiking rates, as is Brazil, as inflationary woes stifle its economy.

India is no exception. The gross domestic product (GDP) growth rate has been faltering and inflation is stubborn, particularly food inflation that is taking the steam off consumption. For now, unless tariff wars begin, economists forecast that the Reserve Bank of India is likely to cut rates in the first half of 2025 by 25-50 basis points.

But the Union Budget will take centre-stage for the near term. Can the government spur consumption that has been sagging? How well can it balance capital expenditure and social spends while containing the fiscal deficit? Some economists suggest opening up of key sectors such as retail, e-commerce, or defence to US firms to pre-empt US tariffs. Or, would the government leverage India’s importance to the US vis-à-vis China?

Indeed, until the Trump-led US policies are spelt out, India and the rest of the world can do well to wait and watch.

Investing insights from our research team

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