The FED recently decided neither to increase nor decrease the US interest rate, keeping it at 4.5%. This decision was widely expected by the market.
However, what comes next? What can the market expect from such a decision? And most importantly, will inflation decrease or rise again in the coming months?
The Inflation Effect
For several months, inflation in the USA had been decreasing, from 3.5% in March 2024 to 2.4% in September 2024.
This is an achievement for the US administration as it proves that their policy of raising interest rates to 5.5% and maintaining it for several months has been successful.
However, inflation began to rise again from 2.4% to 2.9% in December 2024 after the central bank lowered interest rates to 4.5% a few months ago.
As a result, the market expects the central bank to maintain the interest rate at the same level.
One of the reasons or speculations that can be drawn is the expectations of the market and policymakers regarding the possibility of an unexpected surge in inflation in the coming months, especially if a tariff war actually occurs.
Trump Tariffs
As we know, Trump has a vision for a massive revolution in the US industry under his administration.
One of the policies he aims to implement to achieve this is increasing tariffs on countries that do not meet his demands.
And one of Trump's first steps in implementing this policy was threatening Colombia with a 25% tariff increase a few days ago, which ultimately led to Colombia agreeing to President Trump's demands.
Given this, will tariffs achieve Trump’s objectives?
Possibly, but it could also harm the USA if poorly managed. Since tariffs are not a one-sided policy, other countries could retaliate with similar measures if they choose to. If that happens, inflation will most likely rise in the coming months—or even days—once tariffs are widely implemented, forcing companies to increase their prices to keep their businesses afloat.
In this scenario, consumers, who ultimately bear the cost of rising prices, would be the biggest victims of this trade war.
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