It has been an intriguing first quarter of 2025. As ever, we live in interesting times but if there have been general global themes, they are inflation remaining a little sticky, GDP growth jammed in low gear and rate cuts somewhat conspicuous by their absence. The price of gold also touched all time highs. Its status as a safe haven perhaps indicating investors are betting that the chances of stagflation (persistent inflation coupled with insipid economic growth) are a touch higher than many thought.
The outlook for interest rates and inflation is clouded by the U.S. government’s liberal use of tariffs. There is no doubt the President uses them as a blunt instrument; they may be focused nominally upon trade but he deploys them as part of a wider modus operandi designed to strongarm countries/individuals into accepting his agenda. The danger of this tactic for the U.S. is that tariffs are inflationary, which has obvious ramifications for borrowing costs and the path of interest rates. Furthermore, it aggravates cost of living pressures and invites tit for tat reprisals.
Federal Reserve chief, Jerome Powell, recently made it clear that U.S. interest rates were maintained amid uncertainty surrounding the effects of Trump’s trade policies. He went on to say “We do not need to be in a hurry to adjust our policy stance and are well-positioned to wait for greater clarity”. The President responded that the Fed would be better off cutting rates and that Powell should “do the right thing”. One suspects Mr Powell’s grasp of real-world economics is the stronger.
