The fiscal landscape of the United States has become increasingly complex, particularly under the current administration's trade policiesOne aspect that stands out is the divergence between the economic strategies of the Federal Reserve and those of President Biden regarding the inflationary environment and interest rates.

Recent data on inflation has added a degree of confidence to Fed Chair Jerome Powell's stanceAccording to the latest statistics, the annual inflation rate for January 2025 has risen slightly to 3%, a modest increase from the previous month's 2.9%, and this figure outpaced market expectationsMoreover, energy prices, which continue to see fluctuations, have risen 1% year-over-year, primarily driven by narrowing declines in gasoline prices, while natural gas prices have surged by 4.9%.

A noticeable trend can also be seen in the auto marketPrices for used cars and trucks rebounded, increasing by 1% in JanuaryThis reversal in values is generally perceived to relate to presidential tariffs which have influenced purchasing behaviors, causing many potential buyers to adopt a wait-and-see approach and gravitate towards used vehicles insteadThe price of new cars has seen a slight decline of 0.3%, a marginal change from a 0.4% drop noted previously.

When the more volatile categories such as food and energy are excluded from the mix, the core inflation rate for the same month inched up to 3.3% from 3.2% within a monthThis figure also surpassed the market's forecast of 3.1%. The acceleration in prices can primarily be traced back to automotive insurance and the entertainment sector, which reflected a greater surge in costsAlthough the index measuring housing costs slightly fell from the previous month's increase of 4.6% to 4.4%, this remains significant as housing-related expenses account for nearly 30% of the core inflation calculation.

The high interest rates have pushed many consumers away from the idea of purchasing homes, thus pushing them toward the rental market, which in turn has elevated housing rental costs

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Compounding this issue is the current immigration policy enacted by the president, which may lead to a decline in immigration numbers capable of contributing to moderating inflation through a decrease in housing demandHowever, the context is critical: the unemployment rate in the United States has decreased to historically low levels, and job creation continues to flourish, signaling potential structural issues in the job market that might exacerbate wage inflation.

Since taking office, the president has continued to implement tariff measures, announcing his intention to enforce reciprocal tariffs on any country imposing import duties on American goodsThis has fueled market concerns regarding a potential escalation of trade tensionsThe ramifications of these tariffs are likely to emerge more clearly after February 2025. Given that automobiles represent a significant consumer category, tariffs on imported steel and aluminum accrue additional costs for domestic automakers, which will likely be passed on to consumers, signifying a probable uptick in inflation rates in the near future.

Moreover, similar tariff measures targeting different sectors may heighten costs across various consumption facets, further increasing inflation risksThe Federal Reserve's current approach of waiting and analyzing inflationary factors appears justified based on these observations.

As of now, the federal funds rate is positioned within the 4.25%-4.50% rangeFollowing the inflation reports, the market’s expectations that the Fed will maintain the interest rate during the March meeting have surged from a previous likelihood of 83% to an impressive 97.5%.

The Fed's decision to hold off on rate cuts aligns with the presidential tariff policies and is affecting the performances of asset prices in capital marketsThe stock market, often perceived as volatile, lacks a coherent direction at presentOn one hand, the Dow Jones Industrial Average (DJI) saw a minor decrease of 0.50%, while the NASDAQ Index (IXIC) reflected a slight uptick of 0.03%. The S&P 500 Index (SPX) dropped by 0.27%.

Investors are currently focused on corporate earnings and fundamental economic indicators

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