DWS: Uncertainty over unclear policies remains, expected that the Federal Reserve will maintain interest rates unchanged in January
DWS Chief U.S. Economist Christian Scherrmann expects the Federal Reserve to maintain interest rates at the January FOMC meeting, although economic data suggests its stance may be more moderate than in December last year. Uncertainties in policy remain, especially regarding the tariffs and fiscal policies of the Trump administration. The short-term impact of moderately increased tariffs may fade, but large-scale tariff increases could stimulate domestic demand, leading to long-term inflationary pressures. Overall, the Federal Reserve is expected to slightly cut interest rates in March and June, with risks tilted to the upside
According to the Zhitong Finance APP, Christian Scherrmann, Chief U.S. Economist at DWS, commented on the upcoming January FOMC meeting and the potential impact of the Trump administration. It is expected that the Federal Reserve will maintain interest rates at the upcoming January meeting, but the latest economic data suggests that its stance may be more moderate than in December last year. Recent inflation data provides the Federal Reserve with further room for a slight rate cut, although the hiring activity in the job market remains strong, it has not yet generated inflationary pressure. However, uncertainties regarding policy still exist. Federal Reserve officials have understood some of the new government's policy directions, but the direction of tariff policy and fiscal policy remains unclear.
In addition, the slowdown in economic growth and cooling inflation in 2023 and 2024 is mainly due to a large influx of labor, but this trend is expected to weaken significantly, making the economic outlook difficult to predict. Moreover, it is necessary to consider whether the deflationary effects brought about by the economic slowdown are sufficient to offset the price pressures caused by labor shortages.
Regarding tariffs, the key question is whether they are purely a tool of economic and trade diplomacy or if the government plans to use tariff revenues to fill spending gaps. It is anticipated that tariff policy may encompass both aspects: initially used primarily as a diplomatic policy tool, and only after trade agreements are reached will it bring more revenue to the government. This means that tariffs may gradually decrease and be implemented in phases, which could lead to a more moderate impact on market inflation expectations. Federal Reserve officials have differing opinions on this. In the short term, a moderate increase in tariffs may have effects that dissipate after a year, but if large-scale tariffs are imposed, it could stimulate consumer demand for domestic goods, causing wages and prices to soar together. Federal Reserve officials may overlook the short-term inflation brought about by tariffs, but they must take action to respond to the long-term inflationary pressures arising from the labor market.
Overall, given that the new government's policy direction is not yet fully clear, the forecast for Federal Reserve policy remains unchanged: a slight rate cut may occur as early as March, with another opportunity for a rate cut in June, after which the Fed may adopt a wait-and-see approach based on persistent inflation. Currently, the risks are clearly skewed to the upside