The Federal Reserve’s first meeting of 2025 comes at a moment of elevated uncertainty, as a brutal tech sell-off erased trillions in market value and fresh tensions between President Donald Trump and Fed Chair Jerome Powell may threaten to shake interest rate policy in the months ahead.
Tech stocks took a massive hit at the start of the week, driven by concerns over China’s DeepSeek, an open-source AI model that reportedly rivals top U.S. models at a fraction of the cost.
The reaction was swift and severe. The VIX index, also known as market fear gauge, soared 25% on Monday with Wall Street shedding over $1.2 trillion in market capitalization. NVIDIA Corp. NVDA tumbled 16%, erasing nearly $500 billion in value.
Despite the market chaos, it’s a done deal the Fed expected to keep interest rates unchanged at 4.25%-4.50% after three consecutive cuts totaling 100 basis points last year, giving investors no room to hope for a miracle.
Yet, the real focus will be on Powell’s messaging, whether he signals that further cuts are coming or if the central bank will hold firm in its inflation fight despite political interference from Washington.
Trump has a history of pushing for lower interest rates, clashing with Powell during his first term over monetary policy. Now, with inflation moderating, the president appears ready to pressure the Fed again.
At its last meeting in December, the Fed projected only two rate cuts in 2025, revising earlier expectations of four.
Policymakers also raised their inflation forecast for headline Personal Consumption Expenditures to 2.5%, up from 2.1% in September. Core PCE inflation, which excludes volatile food and energy prices, is now seen at 2.5% in 2025, up from 2.2% earlier.
Investors will be watching closely to see if Powell acknowledges recent benign inflation reports, which some argue could justify a more dovish stance.
Goldman Sachs economist David Mericle highlighted in a note Monday that “in the press conference, we will listen for hints about whether the further decline in inflation we expect in coming months could open the door to rate cuts.”
This week’s Fed meeting will be the first since Trump returned to the White House, and tensions between the president and Powell are already heating up.
During a video speech at the World Economic Forum last Thursday, Trump made his stance on interest rates clear: “With oil prices going down, I’ll demand that interest rates drop immediately, and likewise, they should be dropping all over the world.”
Journalists will likely press Powell on whether Trump’s remarks influence policy decisions, but the Fed chair has consistently emphasized the central bank’s independence.
Yet, speculation is already swirling about whether Trump could try to remove Powell before his term expires in May 2026.
According to Kalshi, a CFTC-regulated betting market, there is a 21% chance Powell will be out as Fed chair by the end of the year.
A pressing issue is the potential impact of Trump’s trade policies on inflation. Goldman Sachs estimated last week that new tariffs could add up to one percentage point to inflation if they significantly influence consumer expectations. That could complicate the Fed’s decision-making, forcing policymakers to balance inflation risks with economic growth concerns.
Beyond interest rates and inflation, another potential Trump-Powell clash could emerge over digital assets.
The president signed last week an executive order aimed at strengthening U.S. leadership in digital assets, which some speculate could lay the groundwork for a Bitcoin BTC/USD strategic reserve later this year.
Powell, however, remains firmly opposed to Bitcoin as a central bank asset. “We’re not allowed to own Bitcoin,” he said in December, stressing that the Federal Reserve Act prohibits such holdings.
“People use Bitcoin as a speculative asset… It’s just like gold, only it’s virtual, it’s digital,” he also added.
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