Baker Market Update
2025-01-24

This shortened holiday week has been light on economic data but big on analyzing the first week of the next Trump administration and the potential impacts of new policies that may lie ahead. On Monday, President Trump started his second administration with a blitz of executive orders covering issues that range from trade, immigration and U.S. foreign aid to demographic diversity, civil rights, and the hiring of federal workers.

On Thursday, he followed up with a speech at the World Economic Forum in Davos, Switzerland where he told global business and political leaders that he would demand OPEC lower oil prices and the world drop interest rates. Over the course of his 45-minute virtual appearance, Trump took on European regulators, oil producers, and big banks. He also warned that companies will face tariffs if they make their products anywhere but the U.S.

On the domestic front, Trump put pressure on the Federal Reserve over interest rates. “I’ll demand that interest rates drop immediately,” Trump said in his speech. “And likewise, they should be dropping all over the world. Interest rates should follow us all over.” When asked by reporters later in Washington if he expects the Fed to listen to him on rates, Trump said: “Yeah.”

Futures markets though are pricing in very little in the way of rate cuts this year. Traders suspect that the surprising resilience of the economy, which has weathered a pandemic, inflation spike, and several recession scares in the past few years, may make it more difficult for borrowing costs to come down. The economy has expanded at an annual rate of at least 3% for four out of the last five quarters, which is the longest such streak in a decade. Unemployment remains historically low and inflation, which rose to a four-decade high in 2022 is back down to 2.4%. Traders are also weighing concerns that the new administration’s promises to increase tariffs and implement mass deportations could create additional inflationary pressures. As of this morning, fed funds futures pricing reflects less than two rate cuts for all of 2025 with the first one not coming until June.

Next week we will get more feedback from the Fed about the future of interest rates. The committee is unlikely to move the policy rate, but we will hear from Chairman Powell in the press conference that follows the FOMC meeting. Many expect the Fed to communicate a "wait-and-see" approach as they wait to see what emerges on the inflation front and any potential price pressures from tariffs or deportations before moving policy. We will also get an important reading of December’s Personal Consumption Expenditures (PCE) on Friday, the Fed’s preferred inflation gauge. Have a great weekend!