The Federal Reserve decided to keep interest rates at 4.25-4.5%, diverging from global central banks that have begun easing monetary policy. While the ECB and Bank of Canada have opted for rate cuts, the Fed remains cautious, prioritizing inflation control over immediate stimulus.

For President Trump, this decision complicates economic policy. With the Fed resisting rate reductions, the U.S. dollar remains strong, making exports more expensive and potentially undermining Trump’s tariff strategy aimed at reducing trade deficits. He has repeatedly called for lower interest rates to stimulate growth, but the Fed remains firm in its "wait-and-see" stance. Fed Chair Powell noted he was waiting to see the impact of Trump's policies before making any determination as to how to handle rate levels from here.

The Fed is in a difficult position now, as higher rates are elevating mortgage rates which is keeping home buyers and sellers out of the market. The lack of supply of used homes for sale has forced home prices to remain elevated and prevented existing home owners from upsizing and downsizing. Higher rates are also causing rapidly escalating credit card debt and interest rate payments by the Federal government to skyrocket. On the other hand, lower interest rates contribute to economic expansion, driving wage growth.

Tariffs are inflationary, and may cause economic contraction. If left in place long enough, Trump will be doing the Fed's job of increasing the cost of doing business and cooling the economy, perhaps enough for the Fed to relax rates further back into the "Goldilocks" scenario of moderate economic growth and low interest rates.

PCE Inflation Rises

The Personal Consumption Expense (PCE) index rose 0.3% in December, the highest in eight months, up from 0.1% in November. Goods prices increased 0.2%, while services rose 0.3%. The core PCE index ticked up 0.2%, maintaining an annual rate of 2.8%, while headline PCE inflation climbed to 2.6%. A 2.7% surge in energy costs drove the increase, signaling persistent inflation risks despite Fed efforts to cool the economy.

Job Market Weakens

Americans are growing more pessimistic about the job market, with 16.8% now saying jobs are hard to get - the highest level since March 2021. Meanwhile, those viewing jobs as plentiful dropped to 33.0%, nearing a three-year low. This trend has pushed the labor market sentiment index to its weakest in four years, historically a leading indicator of rising unemployment. As economic uncertainty grows, concerns over job stability could intensify, potentially signaling further labor market softening in the coming months.

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