BOJ, FED Watching U.S. Inflation Closely with Trump Set to Assume Presidency

By Shinichi Ikeda and Hiroyuki Tanaka / Yomiuri Shimbun Staff Writers

21:00 JST, December 20, 2024

TOKYO/WASHINGTON — The Bank of Japan and U.S. Federal Reserve are increasingly cautious about the U.S. economic outlook.

“Risks and uncertainty around inflation, we see as higher,” said Fed Board Chairman Jerome Powell on Wednesday. BOJ Gov. Kazuo Ueda made a similar comment on Thursday, saying there were uncertainties around the future of the U.S. economy.

Behind their remarks is the incoming administration of U.S. President-elect Donald Trump, who promised massive tariff hikes and will be inaugurated in January.

Powell avoided speaking in detail about the promised tariffs at a press conference after a meeting of the Federal Open Market Committee. “It’s very premature to try to make any kind of conclusion,” he said.

However, the Fed’s latest quarterly summary of economic projections showed policymakers’ median projection for the federal funds rate at the end of 2025 rising significantly from September, by 0.5 percentage points, increasing to 3.9% from 3.4%, and also suggested the Fed will make just two 0.25 percentage point cuts in 2025. Given a September estimate of four rate cuts, the latest estimate indicates a slowing in the pace of rate cuts.

The U.S. economy is firm, and inflation is above the Fed’s 2% target. The Fed believes that if Trump enacts policies such as massive tax breaks, higher tariffs and the deportation of undocumented immigrants under the current circumstances, it may lead to an overheated economy and increased wages due to labor shortages, which could create more inflationary pressure.

Subhead: Uncertainties

Meanwhile, the BOJ decided at its policy meeting on Thursday to keep its benchmark interest rate unchanged for the third straight meeting since September. Explaining the reason for the decision, Ueda said at a press conference after the meeting that the BOJ wanted to see how the shunto spring wage negotiations would go in 2025, adding, “There remains significant uncertainty around the economic policies of the next U.S. administration.”

When it comes to the U.S. economy, Ueda said it remains firm. However, if the next U.S. administration imposes additional tariffs and implements other policies as promised, it could not only affect the U.S. economy and prices in the country but also have a significant impact on the global economy and the international capital market.

Foreign exchange

With the BOJ and Fed having made their policy decisions with the next U.S. administration in mind, the yen has dropped against the dollar on foreign exchange markets due to the difference in interest rates between the two countries.

The yen-U.S. dollar exchange rate was between ¥153.57 and ¥153.59 per dollar on the Tokyo foreign exchange market at 5 p.m. Wednesday. After the FOMC meeting, there were more moves to sell the yen and buy dollars. Once the BOJ decided to maintain its policy interest rate at noon Thursday, the yen fell to the ¥155 level. Following Ueda’s press conference, the yen temporarily weakened to the lower ¥157 level on overseas foreign exchange markets.

Sam Bullard of Wells Fargo, a major U.S. financial institution, said the latest Fed projections indicate a possible change in its rate cut cycle.

The Fed might further reduce its pace of rate cuts depending on the next administration’s policies, and the yen could weaken further against the dollar.

If a weaker yen looks like it will bring higher inflation, the BOJ will have to consider additional rate hikes. However, the bank will find it difficult to raise its rate if the U.S. economy is in flux. The central banks will have to consider how the next U.S. administration will act in January and beyond when making their decisions.