Source: Caixin News

The latest prediction from Bank of America indicates that if the Trump administration implements aggressive tariff policies, the Federal Reserve will pause interest rate cuts this year.

The bank pointed out in a memo to clients that "signs of sticky inflation are increasing." Considering the timing of the Trump administration’s arrival, the Federal Reserve may have completed the "final cut" of the current interest rate cut cycle in December.

Bank of America economist Aditya Bhave stated, "Even before we consider fiscal loosening or tariffs, inflation has already entered a concerning phase."

He noted that policy changes will pose an upside risk to personal consumer spending (PCE) - the Federal Reserve’s preferred inflation indicator. Therefore, "if Trump announces large-scale tariffs immediately after taking office, the Federal Reserve may pause interest rate cuts."

Tariffs are taxes imposed by the government on imported Commodities. Economists warn that while American consumers do not directly pay tariffs, some of the tariff costs will be passed on to consumers in the form of higher product prices. At least in the short term, this could cause inflation to rise.

In September last year, the Federal Reserve began the current interest rate cut cycle and cut rates three consecutive times, a total reduction of 100 basis points.

Last month, the Federal Reserve implemented a "hawkish rate cut" by further lowering interest rates by 25 basis points, but it is expected to only cut rates twice in 2025, halving the rate cut expectations from four times in September of last year. Federal Reserve Chairman Powell stated that this forecast takes into account the potential impact of Trump's policies.

The Federal Reserve will hold its first monetary policy meeting of 2025 from January 28 to 29. According to the FedWatch tool from the Chicago Mercantile Exchange (CME), the probability of the Federal Reserve cutting rates by 25 basis points in January is only 4.8%, while the probability of maintaining the current interest rate is as high as 95.2%. Traders also predict that the Federal Reserve will only cut rates once this year.

During his first term, Trump implemented a tough tariff policy and promised to increase tariffs during a second term. According to media reports, Trump is considering declaring a national economic emergency to justify the imposition of universal tariffs.

In recent weeks, U.S. Treasury yields have been steadily rising, indicating that traders expect interest rates to remain high for a longer period, highlighting ongoing inflation concerns among investors. On Wednesday, the yield on the 10-year U.S. Treasury bond briefly rose to 4.73%, the highest level since April of last year. Meanwhile, the yield on the 20-year U.S. Treasury bond surpassed 5%.

编辑/jayden