What this chart shows
This week’s chart illustrates the market’s expectations for US interest rate cuts leading up to the December 2025 Federal Open Market Committee meeting. In the lead up to the US election, rate cut expectations had already tempered as investors began pricing in the likelihood of Trump’s pro-growth and inflationary policies. Following his victory, expectations tempered further due to his policy agenda, including fiscal expansion and tariffs. However, last week’s US inflation print shifted sentiment again. The December CPI report showed inflation rising to 2.9% year-on-year, above the prior month’s reading of 2.7%, but the market latched onto signs of softer core inflation which moved down slightly to 3.2% after being largely flat since June. As a result, investors are now pricing in around 40bps of cuts by the end of 2025 across the eight meetings, whereas prior to the reading and after a strong jobs report, they were less optimistic and only pricing in 20bps of cuts.
Why this is important
The relationship between Trump’s policies and inflation creates a challenge for the Fed. While tax cuts and looser regulation are likely to boost growth, these effects may be partially offset by inflationary pressures from new tariffs and restrictive immigration policies. Historically, these types of policies would force central banks to maintain or tighten monetary policy to contain inflation. Market expectations for lower rates in the US shifted substantially since August but now investors are betting that cooling growth in other parts of the economy might prompt the Fed to ease policy. This uncertainty leaves the Fed in a difficult position: will they prioritise containing inflation, or will they pivot to support growth if economic data softens? Recent CPI trends, particularly in core inflation, suggest a gradual disinflationary trend, but risks remain. If upcoming inflation readings, such as core Personal Consumption Expenditures, exceed expectations in the first half of the year, the Fed may need to rethink its stance—and even entertain the conversation of additional rate hikes.
The anticipation of President-elect Donald Trump's policy implementations, particularly regarding tariffs and trade relations, has introduced uncertainty and potential volatility in global markets, prompting regions worldwide to prepare for economic adjustments
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President-elect Donald Trump signalled plans to designate cryptocurrency as a national priority upon taking office, indicating a potential shift in regulatory focus.
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The US Producer Price Index (PPI) data released on January 14 provided insights into inflation at the production level, serving as a precursor to shifts in consumer inflation.
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Major financial institutions, including JPMorgan, Goldman Sachs, and Citigroup, reported earnings on January 15, offering a glimpse into the health of the financial sector.
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The US Federal Budget Balance was released on January 13, highlighting the monthly difference between government income and expenditure.
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The UK's FTSE 100 share index reached a record high, driven by a weak pound and positive economic data from China, boosting investor confidence
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UK Chancellor Rachel Reeves returned from China with deals worth approximately £600 million, aiming to strengthen economic ties between the two nations.
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The UK Consumer Price Index (CPI) data was released on January 15, providing insights into inflation trends and potential implications for monetary policy.
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UK GDP figures were announced on January 16, reflecting the country's economic performance and influencing future policy decisions.
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The European Union faced potential trade tensions as President-elect Donald Trump threatened to impose tariffs, prompting the EU to consider retaliatory measures to protect its industries.
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Eurozone Consumer Price Index (CPI) data was released on January 17, indicating inflation trends within the bloc and guiding European Central Bank policy.
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Germany's CPI figures were announced on January 16, shedding light on inflation in Europe's largest economy and its potential impact on the Eurozone.
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The Eurozone's trade surplus highlighted its export competitiveness, especially in the automotive and industrial sectors
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China achieved its 2024 GDP growth target of 5%, buoyed by aggressive government stimulus, though concerns over a looming deflationary spiral persist.
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China's retail sales rose 3.7% year-on-year in December, while industrial output expanded by 6.2%, both faster than expected.
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Economists criticized Japan's ultra-loose monetary policy, arguing that it undermines fiscal discipline and raises concerns over long-term economic stability.
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Crude oil headed for its fourth consecutive weekly advance, despite a slight decline on Friday.
