Trump, not yet in office, looms large over global economy By Reuters

Written by Dan Burns and Howard Schneider

WASHINGTON (Reuters) – The global economic reckoning with the incoming Trump administration began in earnest this week, with the Federal Reserve announcing fewer interest rate cuts and other leading central banks signaling caution about future interest rate decisions. .

The Federal Reserve cut interest rates as expected on Wednesday amid a crowded series of year-end central bank meetings from Ottawa and Frankfurt to Tokyo and London that showed increasing uncertainty ahead of Donald Trump entering the White House in the new year.

But Fed officials lowered their expectations for lower interest rates in the face of stubborn inflation, and Chairman Jerome Powell said some at the bank were trying to judge how Trump’s planned tariffs, lower taxes and immigration restrictions would affect policy.

The result was that US central bankers estimated higher growth next year than previous estimates, but also significantly higher inflation.

That left Powell repeatedly urging caution about additional interest rate cuts from here, sending stock prices lower and recalibrating market estimates for further easing. Only one Fed rate cut is now priced in for 2025.

“Some people took a very tentative step and started incorporating very conditional estimates of the economic impacts of policies into their forecasts at this meeting,” Powell said when asked whether Trump’s policies factored into officials’ thinking.

In Asia, the Bank of Japan kept interest rates ultra-low on Thursday as the threat of Trump’s policies cast a pall over the export-reliant economy.

“There is uncertainty about the policies of the next US administration, so we need to examine the impact more carefully,” Bank of Japan Governor Kazuo Ueda said at a press conference, adding that Trump’s trade and financial policies will have a major impact on the global economy and finances. Markets.

A Reuters survey of Japanese companies published last week showed that nearly three-quarters of companies expect Trump to have a negative impact on their business environment, something Bank of Japan officials may have to take into account, as the world’s only advanced central bank is still trying to tighten… Politics.

In Europe, Norway’s central bank kept interest rates unchanged at a 16-year high of 4.50%, highlighting the risk of a trade war between the United States and China.

“High tariffs are likely to weaken global growth, but the implications for Norway’s price outlook are uncertain,” the bank said.

The Riksbank cut its key interest rate by a quarter of a percentage point to 2.50% as expected, but said it now sees reasons to be more cautious about rate cuts in early 2025.

disorder

Prior to the Fed’s decision, the European Central Bank and the Bank of Canada cut interest rates last week. Both are expected to decline further in 2025 amid weak forecasts.

While ECB President Christine Lagarde was vague about further interest rate cuts, she did her best to stress downside risks to growth, including risks from potential trade tensions with the United States under Trump.

The Bank of England is due to announce its latest interest rate decision on Thursday, which is widely seen as on hold and with investors scaling back their bets on 2025 cuts following the Fed’s comments.

Although Trump may have been on the fringes of Fed officials’ thoughts, he was the main focus in Ottawa when Canadian Finance Minister Chrystia Freeland resigned after falling out with Prime Minister Justin Trudeau over how to handle potential US tariffs under the US administration. Coming. .

Freeland said the threat of new US tariffs represents a major risk after Trump warned last month that he would slap 25% tariffs on goods imported from Canada and Mexico unless the neighbors curb the flow of migrants and fentanyl into the US.

“This means keeping our fiscal buffer dry today, so we have the reserves we may need for the tariff war,” she wrote in a letter to Trudeau posted on Exe. “It means avoiding costly political tricks, which we cannot afford.”

Meanwhile, the cryptocurrency market’s enthusiasm for Trump’s idea of ​​creating a strategic reserve of bitcoin suffered a setback when Powell said the Fed had no legal authority to hold it and no plan to seek to change the law so it could.

This observation contributed to a widespread decline in crypto-related assets, including a 5% decline in Bitcoin itself, its largest decline in more than three months.