Financial markets continue to sift through the noise of the new Trump administration, waiting for more clarity on key policies such as tariffs and immigration
The FOMC paused in January, as expected, and forward guidance was mixed
Looking ahead, greater clarity should emerge related to Trump policy priorities, including banking regulation and supervision
The Trump administration began with a flurry of executive orders, but there is still ample policy uncertainty related to economic matters, most notably tariffs. As such, financial markets have been in a bit of a holding pattern waiting for more clarity. That doesn’t imply January was an overly quiet month. On the data front, a strong December jobs report was offset somewhat by a softer December CPI report. The last week of the month began with a tech-driven, risk-off trade that sent benchmark yields lower after it was reported that a Chinese firm had produced a viable AI model at a relatively low-cost relative to U.S. competitors. Even so, major U.S. equity indices still ended the month higher, including the NASDAQ.
For the Fed, the January 29 FOMC meeting ended with policy rates unchanged, as widely expected, but the forward guidance was murkier. The official statement was more hawkish on the margin, with the assessment of the labor market upgraded and the assessment of inflation progress downgraded. However, Fed Chair Powell dampened any hawkish interpretation of the official statement with his comments during the press conference. For now, it appears that the Fed may remain reactive to short-term trends in data metrics, which presents risks to higher interest rate volatility.
Exhibit 1
Source: Bloomberg; ALM First
This leaves two months of inflation and jobs reports before the next FOMC meeting on March 19. Fed funds futures showed little reaction to the January 29 meeting. As Exhibit 1 illustrates, current pricing shows approximately two 25 basis point rate cuts this year. After the December jobs report release on January 10, which was much stronger than expected, futures were effectively priced for just one rate cut this year before rebounding in the other direction after the December CPI report release on January 15. Not coincidentally, the 5-year Treasury yield traded in a 30 basis point range in January. This type of volatility is likely to persist if the Fed maintains a data-dependent approach overly focused on short-term trends.
Looking Ahead
Financial markets will continue to look for more clarity related to the Trump administration’s policy priorities, as well as progress on budget negotiations and the debt ceiling. This includes big headline items in tariffs and immigration, and more clarity on regulatory initiatives, including those affecting the banking industry and financial markets, which will hopefully become clearer in the coming weeks. As it relates to tariffs, the market has taken some comfort in the fact that broad tariffs were not announced immediately as suggested during the campaign. However, on February 1, President Trump announced 25% tariffs on Canadian and Mexican imports and 10% tariffs on Chinese imports. One exception to the 25% Canadian tariff would be energy imports (oil and electricity), which would have a lesser 10% levy. While China hit back immediately with its own tariffs and restrictions, the tariffs on Canada and Mexico have been paused for 30 days. As we move forward, if a tit-for-tat trade war ensues and expands to other countries/regions, such as the European Union, the expected economic and financial market impact becomes more severe.
There have been some recent comments from President Trump that have fueled reaction in some pockets of the market. For example, during a session at the World Economic Forum in Davos, he said he will “demand that interest rates drop immediately” in reference to Fed policy. Shortly thereafter, breakeven yields in the TIPS market, which is a measure of market inflation expectations, widened to the highest level in a year.
On the regulatory front, the general expectation is for easier rules on multiple fronts, but details are limited at this point. For community-based depository institutions there are also open questions, particularly as it relates to expectations for potential changes in regulation and supervision. A Wall Street Journal article last December reported that the Trump transition team was exploring pathways to dramatically shrink, consolidate, or even eliminate certain banking regulators. This included the idea of potentially shifting the focus of the CFPB from its regulatory and supervisory function to consumer education efforts. The article also referenced the Project 2025 document, made famous during the presidential campaign. In this document, there was a call for consolidating the FDIC, OCC, and NCUA. This, of course, is easier to write than to execute, but for now, it presents uncertainty for the year(s) to come.
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