Rates and spending

29 Jan 2025 2 min read

Daily update

The Federal Reserve decides on rates鈥攖he market consensus is for unchanged rates today. US President Trump advocates for rate cuts, but that view point may be biased by their experiences as a borrower. The rate outlook is complicated. Underlying inflation pressures are modest, and keeping real interest rates stable may require rate cuts.
Government policy adds uncertainty, which is reflected in bond market agitation. The Fed has to balance whether government spending restrictions might negatively affect growth, against how much any trade taxes will increase US inflation (specifically, whether US consumers will face second round inflation effects from tariffs).
The US administration retreated from or clarified the limits of the proposed freeze on federal grants and loans. A federal court then temporarily blocked the freeze. If the freeze were allowed, the near-term economic effect would mimic the depressingly familiar effects of selective government shutdown. Longer term, investors鈥� focus will be on whether rule of law is observed, and whether a freeze complicates budget deals in Congress (why support a tax cut, if the quid pro quo spending might be frozen?).
Sweden鈥檚 Rilsbank is expected to lower interest rates another quarter point (after a drop in the headline harmonized inflation rate in December).