Major central banks adopt a wait-and-see approach as Trump's tariff policies cast shadows over global economic outlook. The Fed kept rates at 4.25-4.5% while projecting higher inflation and slower growth. Markets now expect fewer rate cuts in 2025 as policymakers navigate the complex balance between inflation concerns and growth risks.

As Trump's Tariff Push Clouds the Outlook, the Fed Faces a Policy Crossroads

As U.S. President Donald Trump's tariff actions disrupt global trade balances, they are also casting uncertainty over the path of central bank policies. Major central banks announcing decisions this week---especially the Federal Reserve---highlighted the uncertainty caused by tariffs and refrained from taking any action.

On Wednesday, Federal Reserve officials emphasized the growing uncertainties surrounding the economic outlook and maintained a "wait-and-see" approach, leaving interest rates unchanged for a second consecutive meeting at the 4.25%-4.5% range.

Nevertheless, something did change: economic projections. Policymakers now foresee higher inflation, slower growth, and a higher unemployment rate in 2025. These projections echo the concerns voiced by market participants.

On the other hand, while acknowledging the rising risks, Chair Jerome Powell argued that the impact of tariffs on prices would be transitory and downplayed concerns of a potential recession. His remarks were likely an effort to reassure markets.

Indeed, stress on Wall Street eased somewhat, and U.S. equities recovered part of their recent losses. Swap traders scaled down their bets for three quarter-point cuts this year; only two quarter-point cuts---starting in July---are now fully priced in, with less than a 50% chance of a third.

However, given Trump's persistent tariff push, the Fed's policy path is likely to become more complicated in the coming period. If inflation rises, growth slows, and the labor market weakens---as forecast---policymakers will face a tough decision on which side of their dual mandate to prioritize.

The dot plot shows that the median policymaker still anticipates two quarter-point rate cuts in 2025. However, eight policymakers expect only one or none, suggesting that at least a handful of Fed officials are placing greater emphasis on fighting inflation.

As the Duhani Capital Research team, we believe the Fed may deliver fewer rate cuts this year than the markets are currently pricing in --- possibly two or even fewer. Policymakers will seek greater clarity on the economic impact of tariffs before taking any action, and they will probably assess whether the inflationary effects of these tariffs are truly transitory, which could keep them on hold for a while longer.

Looking ahead, expectations for the U.S. economy and the Fed's policy path may become clearer after April 2, when Trump is expected to announce retaliatory tariffs on all countries imposing tariffs on U.S. trade. On the same day, sector-specific tariffs---targeting automobiles, microchips, and pharmaceuticals---are also set to be introduced.

However, the full scope of these tariffs remains uncertain---there are no details yet on which countries will be affected or at what rates. The aggressiveness of the announced measures will play a critical role in shaping expectations for the economic outlook.

Before then, investors will assess next week's release of the Fed's preferred inflation gauge---the Personal Consumption Expenditures (PCE) Price Index---for early signs of tariff impacts. Preliminary March PMI figures will also offer additional insights into the effect on economic activity.

Global Central Banks Pause Amid Uncertainty and Trade Risks

This week, markets closely watched policy decisions from major central banks, including those of Japan, China, and the UK. Amid prevailing uncertainties, central banks viewed staying on hold as the safest course of action and refrained from making any moves.

The Bank of England on Thursday maintained interest rates at 4.5%, shifting away from its previously dovish tone. While wage growth and the new government's tax policies remain a concern in the UK, the BoE placed greater emphasis on trade-related risks, reflecting a cautious stance. The word "uncertainty" and its variations were mentioned 15 times in the meeting minutes---more than twice as often as in the previous meeting six weeks ago.

Similarly, the People's Bank of China also opted to hold off on any interest rate moves on Thursday. Since September, the PBoC has avoided cutting interest rates or the reserve requirement ratio, instead prioritizing the stability of the yuan. Nevertheless, on Thursday, the central bank increased short-term funding support---marking the longest streak of cash injections since late January.

Facing the ongoing burden of Trump-era tariffs, China appears set to continue various stimulus efforts aimed at boosting domestic consumption and achieving its growth targets. Additional stimulus measures could be announced at this weekend's meeting.

Another major central bank hesitant to adjust policy amid global trade uncertainties was the Bank of Japan. On Wednesday, BoJ officials kept interest rates steady at 0.5%, signaling a wait-and-see approach before making any further hikes until there is more clarity on the potential impact of Trump's policies.

Meanwhile, early Friday morning, Japan's national inflation data showed that although price pressures are easing, inflation remained stronger than expected. Excluding fresh food, consumer prices rose 3% in February compared to a year earlier---slowing from January's 3.2% but still above economists' 2.9% forecast.

The deceleration was largely attributed to government energy subsidies, yet inflation continues to run above the BoJ's target. However, economists believe the figures are likely within the BoJ's projections and may not prompt the central bank to rush into further rate hikes while global uncertainties persist.

Amid risks of Trump's tariffs disrupting global trade flows, affected countries are seeking alternative solutions. On Saturday, Japan and China will take steps to stabilize their trade relationship. The meeting will mark the first economic dialogue between the two countries in six years, following years of strained ties due to various disputes.

Looking ahead to next week, PMI data from Japan, the UK, and the Eurozone will offer insights into economic activity. Key inflation and growth figures will be released from the UK, while Tokyo's inflation data will provide additional clues on price pressures in Japan.