JAKARTA, RAKYAT NEWS – Bank Indonesia (BI) has predicted that the U.S. Federal Reserve (The Fed) will only lower its benchmark interest rate once in the second half of 2025. This forecast comes amid concerns about potential trade wars that could drive inflation in the U.S. The anticipated single rate cut could have a significant impact on capital flows and emerging markets, including Indonesia.

BI’s Director of Economic and Monetary Policy, Juli Budi Winantya, explained during a journalist training session in Aceh on February 7, 2025, that global economic uncertainties, particularly regarding trade tensions, were a major factor in The Fed’s decision. Juli noted that the current political climate under U.S. President Donald Trump, particularly his imposition of a 10% tariff on imports from China, could contribute to inflation in the U.S., thereby influencing the Fed’s future monetary policy.

The trade dispute between the U.S. and China is expected to escalate, with China responding by imposing tariffs of its own on certain U.S. goods, including coal, liquefied natural gas, and oil. This trade conflict could also extend to other countries like Mexico and Canada. These developments could cause inflation in the U.S. to rise, affecting The Fed’s stance on interest rates.

Juli pointed out that the Fed’s monetary policy decisions in recent years have had a substantial impact on global capital flows. With the Fed regularly increasing interest rates, foreign capital has been flowing into the U.S., attracted by higher returns. However, if the Fed does not cut interest rates as many had expected, foreign investments might continue to be channeled into the U.S., potentially reducing investment in emerging markets like Indonesia.

The current federal funds rate, which stands at 4.25% to 4.5%, was maintained by The Fed during its January 2025 meeting, following three consecutive cuts at the end of 2024. The decision to keep rates steady has sparked concerns that the Fed may not reduce rates further as anticipated, dampening global expectations of future cuts.

The uncertainty surrounding The Fed’s decisions, combined with the ongoing trade wars and tariff impacts, is contributing to increased volatility in global financial markets. This has led to a growing belief that the chances of further interest rate reductions from the U.S. central bank are limited, adding another layer of uncertainty to the global economic outlook.

For Indonesia, this means that the flow of foreign capital could continue to favor the U.S. rather than emerging markets. As a result, the rupiah could come under pressure, and Indonesia’s economy could face challenges in maintaining stability amid these external factors. The Fed’s policy decisions, along with the political and economic dynamics in the U.S., will continue to shape global financial conditions and impact developing nations like Indonesia.

Juli concluded by emphasizing the need for careful monitoring of global economic trends, especially the developments in the U.S. and its trade relationships. The decisions made by The Fed and other key global players will likely play a crucial role in shaping the economic landscape in Indonesia and other emerging markets in the near future. (Uki Ruknuddin)