President Donald Trump's economic policies are fueling a surge in confidence and economic activity. This unexpected strength may force the Federal Reserve to halt further interest rate cuts, even though Trump has publicly called for them. The Federal Reserve is facing a dilemma: to continue cutting rates and risk stoking inflation, or to pause and assess the impact of Trump's policies.
President Donald Trump's signature bravado was on full display at the World Economic Forum in Davos this week. Ironically, the enthusiasm his election and policies have ignited may be the reason the Federal Reserve hits the pause button on further cuts. It's a peculiar twist, though not entirely surprising—confidence is a potent economic force, and right now, it's surging. Consumer confidence soared to 105.
1 in December, a level not seen since October 2018, bolstered by expectations of tax cuts, deregulation, and tariffs reshaping the economic landscape. Meanwhile, S&P Global’s Flash U.S. PMI for January delivered a double shot of good news: manufacturing eked back into growth territory for the first time in six months, and services marked their 24th consecutive month of expansion. Business confidence, the elusive elixir of economic dynamism, has reached a high not seen since mid-2022.Conventional wisdom says the Federal Reserve cuts rates to juice a slowing economy. When the Fed started cutting in September, it said it was doing so to stave off what it feared was a rising headwind for the labor market. But a 52 percent net optimism among small business owners for economic improvement, the strongest reading since 1983. This isn’t a cry for help; it’s a victory march. And while Trump’s “demand” for lower rates grabbed headlines, the increasing hum of manufacturing recovery and small business hiring plans are likely to keep the Fed on hold. Fed officials also have new variables to weigh. Tax cuts, deregulation, and tariffs—cornerstones of Trump’s economic agenda—are poised to reshape spending and trade patterns, but their impact remains a question mark for Fed officials. Will tariffs drive prices of imports higher or merely shift supply chains? Will tax cuts spur investment or stoke overheating? The answers are still out there—we think the most likely outcome is a long season of adjustment, and the Fed will want to see how they develop before making further interest rate cuts.Even though the Biden administration has passed from this world, the NFIB highlighted that 20 percent of small business owners cited rising input costs as their top concern. Meanwhile, S&P Global’s data pointed to accelerating price pressures, with input costs and selling prices rising at the fastest pace in four months. The University of Michigan’s survey of consumer sentiment showed a sharp rise in inflation expectations. These inflationary signals provide even more reasons for the Fed to take a breather. Yet, the lingering specter of inflation underscores the tightrope the Fed must walk. Fed Chair Jerome Powell’s likely message? The Fed is willing to cut further but is content to pause for now to let data guide the next move—a sign that the central bank’s confidence in the economy is improving
FEDERAL RESERVE INTEREST RATES ECONOMIC CONFIDENCE TARIFFS TAX CUTS INFLATION
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