In 2024, the Federal Reserve achieved an economic soft landing, avoiding a recession while grappling with persistent inflation. The year ended with a rate cut, signaling a pause in monetary easing as officials focused on inflationary risks. Looking ahead to 2025, uncertainty looms under President-elect Trump, with potential inflation pressures from tariffs, labor deportation, tax cuts, and rising deficits.
The Fed’s balance sheet strategy is gaining attention as it plans to slow its wind-down, potentially stabilizing at over $6 trillion in 2025. However, a critical question remains unanswered: the composition of its holdings. Decisions about reducing long-term Treasury and mortgage-backed securities could impact long-term interest rates. If the Fed shifts its holdings toward short-term securities, it may increase private sector demand for long-term bonds, raising yields further.
Fed Chair Jerome Powell’s relationship with President-elect Trump is under scrutiny. Powell, known for his focus on economic stability, may face challenges as Trump seeks to address inflation and potentially critiques the Fed’s performance. With Powell’s term ending in a few years, speculation surrounds who Trump might nominate to the Fed, with Kevin Hassett emerging as a strong contender.
Looking Ahead; New Year Economic
As the Fed enters a pause in rate adjustments, 2025 will bring critical decisions on inflation control, balance sheet strategy, and monetary policy leadership. The interplay of these factors will shape the U.S. economy, with potential volatility in markets and rates. Investors and policymakers alike will be watching closely as the year unfolds.
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