A credit-rating agency warned that inflation could remain above the Federal Reserve’s 2% target because of uncertainty about President Donald Trump’s economic policies.
S&P Global Ratings said that uncertain federal policy could lead to inflation remaining above the 2% target for longer and cool economic trends in 2025 after 2.7% growth in 2024.
“Across U.S. public finance, most sectors will experience stable credit quality in 2025,” the S&P report noted. “However, credit pressure could arise amid the new administration’s federal policy decisions.”
Decisions at the federal level under could also affect credit for U.S. states.
“States’ credit fundamentals have strengthened, providing financial headroom to navigate potential challenging coming budgetary conditions,” the report noted. “In the fiscal 2026 budget cycle, states face increasing costs following a period of inflationary pressure, past wage adjustments, waning federal support, and changes in state-level tax policy.”
Some local governments could also face challenges.
“Economic and federal policy uncertainty heightens the importance of fiscal management in preserving credit quality,” the S&P report said. “Although we don’t expect a significant change in the magnitude of downgrades, we do expect fiscal buffers accumulated in the past three years will erode, heightening instability in a sector that has remained remarkably steady since the pandemic.”
On Wednesday, the Federal Reserve hit pause on its interest rate cutting campaign with a decision to hold rates steady at a range of 4.25% to 4.5% despite Trump’s call for more cuts.
“In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the Fed said in a statement after a two-day meeting. “The Committee is strongly committed to supporting maximum employment and returning inflation to its 2% objective.”
Fed Chair Jerome Powell said there’s no rush on cuts.
“With our policy stance significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,” he said.
Powell was asked about Trump’s call last week to immediately drop interest rates, but Powell said he wouldn’t comment.
“I’m not going to have any response or comment whatsoever on what the President said,” Powell said. “It’s not appropriate for me to do so.”
Trump’s comments on interest rates came at the same meeting where he told business leaders to expect tariffs. He said that businesses that don’t make products in America will pay some kind of tariff.
“My message to every business in the world is very simple: Come make your product in America and we will give you among the lowest taxes of any nation on Earth,” Trump said. “But if you don’t make your product in America, which is your prerogative, then very simply, you will have to pay a tariff of differing amounts, but a tariff which will direct hundreds of billions of dollars – even trillions of dollars – into our Treasury to strengthen our economy and pay down debt.”
World Trade Organization Director-General Ngozi Okonjo-Iweala, a former Nigerian finance minister, previously warned that a trade war could hurt all players.
“If we have tit-for-tat retaliation, whether it’s 25% tariff [or] 60% and we go to where we were in the 1930s we’re going to see double-digit global GDP losses. That’s catastrophic. Everyone will pay,” she said at the Davos meeting.
Trump has said he plans to impose a 10% tariff on all imports from China and a 25% tariff on imports from Mexico and Canada starting Feb. 1.
