We expect the Fed to remain on hold at the January FOMC meeting, but current data may suggest a less hawkish stance than in December. Recent inflation data keeps the door open for further but limited rate cuts. And labor markets - despite robust hiring - are currently not a source of inflationary pressure.

What remains, however, is policy uncertainty. While central bankers now have some input from the new administration, it remains unclear how tariffs will be used, not to mention how fiscal policy will be shaped. Moreover, growth and disinflation in 2023 and 2024 were supported by a large inflow of working-age people, but early estimates suggest that this inflow will decline significantly going forward. The economic consequences are difficult to assess, and it remains uncertain whether potential disinflationary trends from lower growth can offset potential price pressures from tighter labor markets due to reduced labor supply.

As for tariffs, the question remains whether they are truly an instrument of economic statecraft or whether the administration intends to use them to finance spending. We expect a hybrid outcome in which they are first a foreign policy tool and later, as trade deals are finalized, may contribute somewhat to government revenues. This implies a narrative of fewer tariffs and a more gradual phase-in, which could support expectations of a less significant impact on inflation. There seems to be a mixed debate among central bankers on this issue. A mild and punctual increase in tariffs could disappear from inflation calculations after a year, but broad and significant tariffs could support domestic demand for certain goods to such an extent that a price and wage spiral becomes possible. While central banks are likely to ignore temporary price increases from tariffs, they will need to respond to more permanent price pressures emanating from labor markets.