Investing.com – Stock markets reacted cautiously to the publication of the Fed’s latest minutes, which shed light on internal debates surrounding the decision to cut key rates by 25 basis points in December. While US stock indices remained under pressure, the US Dollar extended its rebound, supported by rising bond yields and a climate of uncertainty over future trade policies.
Fed worries about impact of trade policy changes
The FOMC (Federal Open Market Committee) Minutes revealed that several central bank officials are now incorporating “tentative” assumptions on possible trade and immigration reforms announced by President-elect Donald Trump. While recent public statements from Fed officials have downplayed the potential impact of these changes, the minutes highlight several internal discussions about the implications of significant shakeups in U.S. economic policy.
This concern is reflected in the assessment of inflation: the Fed estimates that customs tariffs or substantial changes in trade policies could make the reading of inflation more complex and extend the period where it remains above of the 2% objective. In the immediate future, the central bank notes that the American economy continued to grow at a “solid” pace in 2024, but also that the labor market remains tight, with a low unemployment rate despite a certain slowdown.
Rate hikes less likely, but tightening slows
Despite the decision to cut rates at the December meeting, most of the FOMC agrees that it is time to reduce the pace of monetary easing. The report highlights “political uncertainty” as one of the major factors pushing the Fed to be more cautious for the remainder of 2025. The institution could thus delay any further rate cuts if inflationary pressures persist, particularly in a scenario of increased trade tensions.
According to some sources, President-elect Trump is considering declaring a “national economic emergency” to implement new protectionist measures. If this were the case, rising import tariffs could once again fuel inflation and weigh on global growth, elements that the Fed monitors closely in its simulations.
The dollar boosted by high yields and global uncertainties
In this context, the US dollar continued to rise towards 109, supported by the rise in bond yields. The 10-year sovereign rate rose above 4.70%, a level which had not been reached for several months, while the gap with the 2-year yield narrowed, illustrating fears of market regarding the future trajectory of rates.
Operators are turning to safe havens and the American currency is benefiting from this movement. Expectations of a rapid rate cut from the Fed have been pushed back, particularly given the resilience of the job market and inflationary risks linked to trade policy. In this atmosphere, the greenback is consolidating its status as a safe bet, reinforced by attractive real yields.
Perspectives
While the markets digest the elements provided by the FOMC Minutes, attention will now focus on the publication of official employment statistics on Friday. This meeting is of particular importance because it will take place after a day of closure on Wall Street. A result higher or lower than expectations could provoke an exacerbated reaction, in the absence of quotes the day before.
If the job market and inflation continue to prove robust, the Fed will have even less room to lower its rates, which would further consolidate the strength of the dollar. Conversely, a significant moderation could restore momentum to equity indices, particularly if it allows us to anticipate a reduction in inflationary pressures and a relaxation of monetary policy. Until then, volatility is expected to remain high, reflecting uncertainties surrounding the next US administration and developments in the global economy.
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