Global Economic Policy in the Trump Administration

By Balazs Koranyi and Howard Schneider

FRANKFURT (Reuters) – Global economic policymakers expected an economic crisis under the new U.S. administration, but instead, Donald Trump has shown a surprisingly restrained start, combining significant rhetoric with cautious action.

Trump initially hinted at imposing sweeping trade barriers. However, his first week focused on domestic policies, leaving the global trade landscape relatively unchanged.

Despite threatening a 25% tariff on imports from Canada and Mexico effective Feb. 1, his current restraint has fostered cautious optimism in the global outlook.

Central banks like the European Central Bank, the Bank of Canada, and the Bank of England are anticipated to consider cutting interest rates, betting on a continued slowdown in inflation.

The U.S. Federal Reserve is expected to refrain from further easing during its Wednesday meeting. It argues that inflation might decrease slowly due to a robust economy and ongoing tariff risks, which may frustrate Trump, who pressures the bank to lower borrowing costs.

After threatening China with tariffs of up to 60%, Trump expressed optimism about potentially negotiating an agreement with Chinese President Xi Jinping. Trump described their conversation as “good” and “friendly,” emphasizing that he would prefer not to impose tariffs on China. A Chinese Commerce Ministry official indicated willingness to collaborate with Washington on maintaining stable trade relations.

These comments have increased market confidence that inflation will continue to ease, providing global central banks the opportunity to lower rates and stabilize after recent price surges. Markets reacted positively, with stock rallies and declining oil prices

The Bank of Japan increased rates as expected, Singapore eased policy, and a cut in Sweden is anticipated, indicating that Trump’s initial week of presidency has left future rate paths largely unchanged.

Paul Gruenwald, global chief economist at S&P Global Ratings, noted that Trump’s pronouncements were not taken literally but viewed as a mix of policy intent and political rhetoric. Consequently, investors are digesting the likely volatility surrounding the Trump administration’s future actions.

Some leaders view Trump’s softened stance on China as a significant shift, suggesting a desire for new understanding and de-escalation of critical relations for the global economy. However, uncertainty persists, prompting policymakers to exercise caution.

Analysts initially estimated the People’s Bank of China might cut rates or inject liquidity, but it has maintained its stance due to concerns surrounding the yuan’s depreciation amidst rising trade tensions.

Most emerging market central banks are not expected to adopt a hawkish stance, except for Brazil, which has resumed its rate hike cycle. The volatility initiated by Trump and ongoing inflation risks create limited opportunities for rate cuts among these banks.

During the World Economic Forum in Davos, South African Reserve Bank Governor Lesetja Kganyago remarked that there are “too many moving parts” to assess price pressures accurately at this time.

The upcoming Fed meeting is the immediate focus, drawing attention to the paradox that the slow decrease in U.S. inflation corresponds with an unexpectedly robust economy, which ideally should benefit Trump.

Dario Perkins from TS Lombard commented that the situation “soft-landed,” with inflation normalizing, the labor market rebalanced, and no significant underlying macroeconomic financial imbalances present.

“So really, you just have to not destroy that.”