Key dishes to remember
- The federal reserve should largely have its key interest rate when it meets on Wednesday, but it is in the air, that this will reduce interest rates later in the year.
- The Fed may be forced to bail out the economy by reducing interest rates if President Donald Trump’s prices have reserved the job market.
- The central bank could also decide to maintain higher interest rates longer to combat inflation if prices increase prices too much.
- The Fed can face a higher dilemma of inflation and unemployment, forcing it to choose the problem to solve with its monetary policy.
The decision of the Fed monetary policy on Wednesday will take place in a context of massive uncertainty, which has reached a summit of all time before the prices of the “liberation day” of President Donald Trump.
The uncertainty about the future actions of the federal reserve has reached its highest level since at least 1985, according to the reading of this week of the Baker-Bloom-Davis index of the uncertainty of monetary policy. The index reflects the information of March and measures uncertainty by counting newspaper articles with specific keywords.
Although the federal reserve should largely hold its key interest rate in its meeting on Wednesday, what happens after that is much more in place in the air. Record uncertainty has highlighted the Fed’s challenge: he does not know exactly how the economy will react to Trump’s unprecedented trade wars.
Fed inflation combat
The federal reserve has its interest rate at a high level since January, which maintains relatively high borrowing costs in order to discourage loans and expenses and lower inflation.
Trump’s prices shaken up the prospects and put the Fed on a difficult base. A major unknown is whether and how long the Trump administration will conclude agreements with American business partners to remove or reduce prices.
In the meantime, economists expect Trump prices – including a global import tax of 10% on American trade partners and 145% rights on Chinese products – to increase the cost of living, which would be a setback in battle against inflation. In response to an increase in inflation, the Fed could maintain its Fed funds at a high rate or even increase it, increasing borrowing costs on all kinds of loans.
However, prices can also damage the economy by costing jobs or even causing a recession. This would require the opposite response: reduce interest rates to give companies and consumers easy money, which increases the economy in difficulty and encourages employment growth.
Since the Fed cannot do both at the same time, it should choose which to prioritize. The financial markets are currently betting that the FED will be forced to save the economy as the labor market is weakening and is starting to reduce interest rates in July according to the Fedwatch tool of the CME group, which provides rate movements based on Fed’s term negotiation data.
But the economy enters an Uncharted territory with Trump’s prices, and for the moment, the Fed should wait more clarity on the trajectory of the economy before acting. If a pricing shock on the job market is on the way, it did not appear in April, when employers added 177.00 jobs. This can encourage the Fed to stand stable longer.
“The economy remains at the forefront of a knife, so to speak,” wrote Michael Gapen, chief economist of the United States in Nationwide, in a comment. “We believe that the employment report will allow the Fed to feel comfortable that monetary policy is in good position until greater clarity is revealed.”
