US Fed Meeting: No Room For Cut On March 19! How Trump's Tariffs Will Play Big Role In FOMC's Rates Decision?

Fed Meeting: The two-day monetary policy meeting by the US Federal Reserve has commenced from March 18, and the outcomes will be announced by Jerome Powell and his team on March 19. The Fed is in a dilemma despite the softer-than-expected US inflation figures. The reason is President Donald Trump's relentless tariffs on foreign countries, that have kept experts, and the market in jitters. Fear of a trade war, inflationary pressure, and most importantly recession concerns for the US economy are some of the cons that Trump's tariffs have caused. Experts believe Fed will most likely hold key fund rates on Wednesday, which will be for the second time in 2025.

"After 100bp of interest rate cuts in late 2024, Chair Powell suggests that the Fed aren't in a hurry to ease policy further and a no change outcome is widely expected on 19 March," said analysts at ING.

However, the analysts added, "But President Trump's spending cuts and trade protectionist policies are hurting growth prospects and will likely force the central bank's hand in the second half of 2025."

Explaining in detail, ING's analyst pointed out that at the start of 2025, there was plenty of optimism around, because the US economy was in decent shape, and it was expected that Trump would turbocharge the growth story with tax cuts and deregulation.

"When combined with potentially inflation-boosting tariffs and immigration controls markets sensed the Federal Reserve would have less scope to cut rates. As recently as 12 February financial markets were pricing only one 25bp interest rate cut for the year ahead," ING's note said.

However, the situation changed drastically, when Trump's tariff plans heightened and expanded to further shores than Mexico, Canada and China. He has already imposed 25% tariffs on imports from Mexico and Canada with some exemptions, while he doubled tariffs to 20% from 10% on China. He has threatened to levy as much as a 200% tariff on alcohol from the European Union, while he has announced a 25% reciprocal tariff on all steel and aluminium imports, autos, chips and pharma companies which is expected from April 2. He promised to impose more tariffs if needed!

All of this are recipe for escalating a trade war between the USA and the countries that would be likely impacted by Trump's tariffs.

ING's analysts highlighted that it turns out that President Trump's initial priorities are government spending cuts and trade protectionism. This has heightened concerns about job cuts, not just for Federal government workers, but also potentially amongst millions of private sector contractors employed in the government sector.

The analysts further explained that The use of tariffs, which may escalate significantly as President Trump seeks to reshore manufacturing activity, is raising concerns about potential price hikes hurting consumer spending power and a fear amongst corporates that higher input costs could squeeze profit margins. Reciprocal tariffs from foreign governments and consumer boycotts would then compound the problems for US exporters. The result has been weaker sentiment and spending numbers.

Thereby, ING's note said, "We expect the Federal Reserve to remain on hold on 19 March, but a weaker growth outlook could lead to rate cuts in the second half of 2025."

So, even when US CPI inflation calmed to 2.8% in February 2025 from 3% in January, well below market estimates of 2.9% --- Fed has little room to cut rates on March 19.

Greg Mcbride, CFA, Bankrate Chief Financial Analyst said, "Inflation is the type of thing that would keep the Fed on the sidelines, but a sharp slowdown in growth, or a rapid deterioration of the labor market, could prompt the Fed to resume cutting rates."

"Save the economy from a slowdown or keep inflation in check? Fed officials could be forced to 'choose one over the other," Mcbride said.

Also, Chris Beauchamp, Chief Market Analyst, at IG Bank in his note said, "The Fed's primary considerations continue to revolve around inflation trends and labour market conditions. While inflation has shown signs of moderating toward the Fed's 2% target, policymakers remain vigilant about potential resurgences."

"This anticipated rate hold would mark the Fed's ongoing cautious approach as it navigates through economic uncertainties. Recent economic indicators have been sending mixed signals, complicating the central bank's decision-making process," Beauchamp said.

Earlier in March, in an interview with Fox News, Trump did not rule out that his tariff policies could fuel a recession. He urged US citizens to brace for the period of transition.

US Fed Rates:

In January 2025 policy, Powell's committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent.

However, FOMC said on Janaury 29, that recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. It added, "Inflation remains somewhat elevated."

FOMC aims to achieve maximum employment and inflation at the rate of 2 percent over the longer run. During this policy, Powell had hinted at fewer rate cuts in 2025.