How Trump’s tariff and deportation threats are affecting the Fed’s interest rates

President Donald Trump may want lower interest rates, but the Federal Reserve will almost certainly keep its benchmark interest rate unchanged at its two-day policy meeting that ends Wednesday.It is likely to be a quiet start to an eventful year for the central bank. Trump said last week in Davos, Switzerland, that he would bring down energy prices, then “demand” that the Fed lower borrowing costs.Later, when asked by reporters if he expected the Fed to listen to him, he said, “yes.” Presidents in recent decades have avoided publicly pressuring the Fed out of deference to its political independence.Outside of a U.S. President bending norms, the Fed also faces challenges in achieving its economic objectives. Inflation remains above its 2% target: Its preferred measure is at 2.4%, though core prices—considered a better gauge of where inflation is headed—rose 2.8% in November from a year ago.Fed officials, led by Chair Jerome Powell, want to thread a moving needle: By keeping borrowing costs higher, the Fed hopes to slow borrowing and spending enough to reduce inflation, but without causing a painful recession.Powell said in December that the central bank has entered a “new phase,” in which it expects to move more deliberately after cutting its key rate to 4.3%, from 5.3% in the final three meetings of 2024. In December, Fed officials signaled they may reduce their rate just twice more this year. Goldman Sachs economists believes those cuts won’t happen until June and December.A cut in March is still possible, though financial markets’ futures pricing puts the odds of that happening at just one-third.As a result, American households and businesses are unlikely to see much relief from high borrowing costs anytime soon. The average rate on a 30-year mortgage slipped to just below 7% last week after rising for five straight weeks. The costs of borrowing money have remained high economy-wide even after the Fed reduced its benchmark rate.That is because investors expect healthy economic growth and stubborn inflation will forestall future rate cuts. They recently bid up the 10-year Treasury above 4.80%, its highest level since 2023.Another reason for caution among Fed policymakers this year is that they will want to evaluate any changes in economic policy by the Trump administration. Trump has said he could slap tariffs of 25% on imports from Canada and Mexico as early as February 1. During his presidential campaign he threatened to impose taxes on all imports.The Trump administration has also said it will carry out mass deportations of migrants, which could push up inflation by reducing the economy’s ability to produce goods and services. At the same time, some economists say Trump’s promises to deregulate the economy could lower prices over time.When Trump imposed tariffs on a limited number of imports in 2018 and 2019, Fed economists expected the biggest impact to fall on economic growth, with the inflationary impact being relatively minor. As a result, when growth did slow, the Fed ended up cutting its key rate in 2019, rather than raising it to fight off any inflationary impact.On Wednesday, Fed officials could also change the statement that they release after each meeting to upgrade their assessment of the labor market, a signal that rate cuts may be delayed.In December, the statement included a mildly pessimistic take: “Labor market conditions have generally eased, and the unemployment rate has moved up but remains low.” In the summer and fall, employers slowed their hiring. The rise in the unemployment rate had unnerved Fed officials and was a big reason they reduced their key rate by an unusually large half-percentage point in September.Earlier this month, Fed governor Chris Waller cited weaker hiring as evidence that the Fed’s key rate is “restrictive,” meaning it is acting as a brake on the economy and should bring down inflation over time. If rates are restrictive, that means the Fed would have more room to cut them if inflation were to decline further.Yet this month, just a few days after Waller’s remarks, the December jobs report showed that hiring accelerated and the unemployment rate slipped to a low 4.1% from 4.2%.The healthier employment numbers suggested that hiring has at least levelled off. If it stays as strong as last month, the improved job gains would suggest the Fed’s rate isn’t restrictive at all, and few, if any, rate cuts are needed.

—Christopher Rugaber, AP Economics Writer