Rates on Hold
What has President Trump said this week?
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What has President Trump said this week? 〰️
1. Consumer Confidence Slides to the Lowest Since 2014
U.S. consumer confidence fell sharply in January to its lowest level in more than a decade, according to the Conference Board. The headline index dropped to 84.5, down 9.7 points from December, marking its steepest monthly decline in over four years and the weakest reading since May 2014 (AP News, 2026; Financial Times, 2026). The expectations index fell to 65.1, well below the 80 threshold historically associated with elevated recession risk, signaling rising concern about future economic conditions.
The decline stands in sharp contrast to strong headline growth data. U.S. GDP expanded at a 4.4% annualized pace in Q3 2025, with the Atlanta Fed projecting growth as high as 5.4% in Q4, while real consumer spending rose 3.5% in the third quarter (Financial Times, 2026). Analysts argue this gap reflects an increasingly “K-shaped” economy, in which higher-income households, supported by stock market gains, continue to spend, while lower-income households face persistent pressure from prices, job uncertainty, and credit conditions (Financial Times, 2026; Reuters, 2026).
From a macro and markets perspective, sustained weakness in confidence raises the risk of slower consumer spending, particularly for discretionary and credit-financed purchases. For investors, the key question is whether January’s collapse reflects a temporary reaction to inflation and policy uncertainty, or the start of a broader downshift in consumer behavior that could weigh on earnings, retail demand, and interest-rate expectations later in the year (Bloomberg, 2026).
2. The Fed’s First 2026 Decision
The Fed has hit pause. After three cuts in late 2025, its first decision of 2026 was to hold interest rates at 3.5%–3.75%. Chair Jerome Powell signaled a “wait-and-see” posture as the Federal Reserve balances improving inflation dynamics against a still-resilient economy, with reporting noting internal differences among policymakers over whether additional cuts are warranted in the near term (The Washington Post, 2026; BBC, 2026). As a result, market expectations shifted toward fewer or later rate cuts if growth and inflation remain firm.
So far, the policy path can be summarized as easing in 2025 to insure against labor-market cooling, followed by a pause in early 2026 as risks appear more balanced. For households and businesses, the pause slows the near-term decline in borrowing costs, mortgages, auto loans, and credit lines, while preserving policy flexibility if incoming data weaken. For investors, the key transmission channels are (1) the path of short-term rates, which affects financing costs and floating-rate debt, and (2) whether delaying expected cuts tightens overall financial conditions by pushing rate expectations further out (Financial Times, 2026).
The decision also landed amid an unusually intense debate over central-bank independence. President Trump has publicly pressured the Fed to cut rates, arguing that holding rates steady costs the U.S. economy “hundreds of billions of dollars.” Tensions escalated further after the Justice Department opened a criminal investigation into Powell’s congressional testimony related to cost overruns on renovations at the Fed’s headquarters. Powell has described the investigation as a “pretext,” warning that it raises the risk of monetary policy being shaped by political pressure rather than economic evidence (The Guardian, 2026).
Despite declining to comment directly on the investigation, Powell emphasized that a majority of policymakers view rates as near neutral, suggesting that additional cuts are unlikely in the near term. He reiterated that Fed credibility and independence are critical to anchoring inflation expectations, cautioning that if markets begin to doubt institutional independence, term premiums and volatility could rise, even without an immediate change in policy (The Washington Post, 2026; The Guardian, 2026).
3. 25% Tariff Threat on South Korea
U.S. President Donald Trump has announced that the United States will raise tariffs on South Korean imports to 25%, accusing Seoul of “not living up” to a trade deal reached last year (BBC, 2026). Under the earlier deal, the U.S. had reduced its “reciprocal” tariff on many South Korean goods to 15%, but the administration has warned that the higher 25% rate will apply if South Korea’s legislature does not complete ratification (Bloomberg Law, 2026; AP News, 2026; BBC, 2026). The message from the White House is that domestic political approval in Seoul is now a condition for maintaining lower tariffs.
The escalation specifically targets autos, lumber, and pharmaceuticals, with the possibility that broader trade flows could be affected if higher tariffs are extended (ABC News, 2026; Financial Times, 2026). South Korea exported roughly $123 billion of goods to the U.S. last year, including about $30 billion in automobiles, making the U.S. one of its most important export markets (BBC, 2026). For exporters, a jump from 15% to 25% would likely compress margins or force price increases, for U.S. importers and downstream manufacturers, it would raise input costs and complicate 2026 supply-chain planning.
Markets have so far reacted cautiously. Shares of major Korean automakers initially fell by up to 6%, but losses narrowed, and South Korea’s Kospi index ended the day up 2.7%, suggesting investors remain skeptical that the tariff increase will be sustained (BBC, 2026). South Korea has said it was not formally notified of the tariff move and is seeking urgent talks with Washington, with its industry minister planning to travel to the U.S. (BBC, 2026).
The dispute also ties back to a broader package that reportedly included a $350 billion South Korean investment pledge to the U.S., some linked to shipbuilding and industrial capacity, but the enabling legislation remains politically contested and not fully codified (Financial Times, 2026; The Wall Street Journal, 2026; BBC, 2026). The key watch items are (1) whether Seoul passes the approval package, potentially as soon as February, and (2) whether the tariff threat is used to secure targeted investment commitments, rather than evolving into a long-duration tariff regime affecting trade and supply chains.