By Dan Burns and Howard Schneider
WASHINGTON (Reuters) – The world’s economic reckoning with the incoming Trump administration began in earnest this week, with the U.S. Federal Reserve announcing fewer rate cuts and other major central banks signaling caution about future rate decisions. .
The Federal Reserve cut rates as expected Wednesday amid a busy series of year-end central bank meetings from Ottawa and Frankfurt to Tokyo and London that showed greater uncertainty before Donald Trump enters the White House in the new year.
But Fed officials scaled back rate cut projections in the face of persistent inflation and Chairman Jerome Powell said some at the bank were trying to judge how Trump’s planned tariffs, lower taxes and immigration restrictions would fare. affect policy.
The result was that American central bankers made estimates of higher growth next year than previously estimated, but also of markedly higher inflation.
That led Powell to repeatedly urge caution about further rate cuts going forward, prompting a drop in stock prices and a recalibration of market estimates for further easing. A single Fed rate cut for 2025 is now on the cards.
“Some people took a very preliminary step and started incorporating highly conditional estimates of the economic effects of policies into their forecasts at this meeting,” Powell said when asked whether Trump’s policies influenced officials’ thinking.
In Asia, the Bank of Japan kept interest rates ultra-low on Thursday as the threat of Trump’s policies cast a shadow over the export-reliant economy.
“There is uncertainty about the policies of the next US administration, so we need to examine the impact more carefully,” Bank of Japan Governor Kazuo Ueda said at a news conference, adding that Trump’s trade and tax policies would have a huge impact on the global economy and finances. markets.
A Reuters survey of Japanese companies released last week showed that nearly three-quarters expect Trump to have a negative effect on their operating environment, something BOJ officials may have to take into account as the world’s only developed central bank is still trying to toughen its policy.
In Europe, Norway’s central bank kept its policy rate unchanged at a 16-year high of 4.50% and highlighted the risk of a trade war between the United States and China.
“Higher tariffs will likely slow global growth, but the implications for the price outlook in Norway are uncertain,” the bank said.
Sweden’s central bank cut its key interest rate by a quarter of a percentage point to 2.50% as expected, but said it now saw reasons to be more cautious about cutting rates in early 2025.
SEIZURE
Before the Federal Reserve’s decision, the European Central Bank and the Bank of Canada had already lowered interest rates last week. Both are forecast to decline further in 2025 amid weakened outlooks.
While ECB President Christine Lagarde was vague about further rate cuts, she went out of her way to emphasize downside risks to growth, including potential trade tensions with the United States under the Trump administration.
The Bank of England is scheduled to announce its latest rate decision on Thursday, which is widely seen as on hold and with investors trimming their bets on cuts by 2025 following comments from the Federal Reserve.
While Trump may have been just on the periphery of Federal Reserve officials’ thinking, he was a central focus in Ottawa when Canadian Finance Minister Chrystia Freeland resigned after clashing with Prime Minister Justin Trudeau over how to handle potential tariffs. Americans under the next US administration. .
Freeland said the threat of new U.S. tariffs posed a serious danger after Trump warned last month that he would impose 25% levies on goods imported from Canada and Mexico unless the two neighbors limit the flow of immigrants and fentanyl to the United States. Joined.
“That means keeping our fiscal powder dry today, so that we have the reserves we may need for a tariff war. That means avoiding costly political tricks, which we cannot afford,” he wrote in a letter to Trudeau published in X.
Meanwhile, the cryptocurrency market’s enthusiasm for Trump’s idea of establishing a strategic bitcoin reserve took a hit when Powell said the Federal Reserve had no legal authority to maintain it nor any plan to seek a change in the law to do so. out.
The comment contributed to a broad decline in cryptocurrency-related assets, including a 5% drop in bitcoin itself, its biggest drop in more than three months.