Jobs Report and Tariffs Put Fed Policy to the Test in 2025’s Uncertain Start

Could Early Volatility Signal a Trump-Fed Collision in 2025?

The first week of trading in 2025 has already delivered a dose of volatility, hinting at a turbulent year ahead. With the December jobs report due on Friday and debates over tariffs and Federal Reserve policy taking center stage, markets are bracing for potential disruptions. These early signals suggest the year’s tone could be defined by a clash between U.S. President-elect Donald Trump and Federal Reserve Chair Jay Powell, particularly if inflation and interest rate policies collide.

Fed Rate Cuts in Jeopardy?

The Federal Reserve’s December meeting minutes underscore a growing unease about persistent inflation, which remains above the 2% target. Officials highlighted risks linked to trade and immigration policies, raising doubts about the pace of anticipated rate cuts in 2025. Trump’s push for aggressive economic measures, including new tariffs, could exacerbate inflationary pressures, forcing the Fed to rethink its policy trajectory.

Wall Street’s expectations have already adjusted. The Fed’s latest projections show only two quarter-point rate cuts in 2025, a slower pivot than many had hoped for. Still, Fed Governor Christopher Waller maintains optimism, believing inflation could ease enough to support moderate rate cuts if conditions align.

Liquidity and the Fed’s Balance Sheet

Managing liquidity remains a key focus for the Fed, as its quantitative tightening (QT) efforts continue. Since peaking at $9 trillion, the Fed’s balance sheet has shrunk to just under $7 trillion. Officials aim to conclude QT by midyear, with banking reserves stabilizing at approximately $3.125 trillion.

Complicating this effort are uncertainties around government borrowing needs and market volatility. Potential debt ceiling debates or instability in private repo markets could force the Fed to modify its strategy, adding another layer of complexity to liquidity management.

Markets React to Inflation Warnings

Despite inflation concerns, equity markets have remained resilient. On Wednesday, the S&P 500 rose 0.16%, the Dow Jones gained 0.25%, and the Nasdaq Composite slipped a marginal 0.06%. Investors appear to have priced in the Fed’s cautious stance, reflected in the December dot plot that signaled slower rate cuts.

However, the bond market paints a different picture. The 10-year Treasury yield climbed to 4.73%, its highest since April, signaling skepticism about the Fed’s ability to tame inflation without further tightening or delayed cuts.

Market Outlook: Early Caution

The December jobs report will be a key barometer for 2025’s early momentum. With inflation risks, tariff debates, and liquidity challenges shaping the backdrop, traders should brace for continued volatility.

If the first week is any indication, policy clashes could dominate market dynamics, with Trump’s economic agenda testing the Fed’s resolve. For now, the outlook leans neutral to bearish, as markets weigh risks against the potential for modest easing later in the year.

More Information in our Economic Calendar.