The Federal Reserve is set to announce a 25 basis point interest rate cut following President-elect Donald Trump’s victory, a move analysts expect as part of ongoing efforts to address inflation and manage economic growth.
This decision comes in the wake of significant economic data, including cooling inflation and weaker-than-expected job growth, and is likely to be a continuation of the Fed’s efforts to ease borrowing costs.
Policymakers on the Federal Open Market Committee (FOMC) are expected to lower the benchmark federal funds rate to a range of 4.5% to 4.75%, down from the previous range of 4.75% to 5%. This follows a larger-than-usual rate cut of 50 basis points in September, marking the first reduction in four years as the Fed sought to counter the effects of inflation driven by pandemic-related disruptions and fiscal stimulus measures.
Fed Chairman Jerome Powell will hold a press conference following the announcement, providing insight into the Fed’s future rate-cut strategy. While inflation has shown signs of easing, it remains above the Fed’s 2% target. In September, the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) index, increased by 2.1%, slightly down from the previous month, indicating that inflation is cooling but not yet fully under control.
The US labor market is also showing signs of strain. The Labor Department’s October jobs report revealed a smaller-than-expected gain of just 12,000 jobs, well below the forecast of 113,000. This, coupled with economic dislocations caused by factors such as labor strikes and hurricanes, has added further pressure on policymakers to support economic activity through rate cuts.
Markets had already priced in the expectation of the 25 basis point cut, and while Trump’s election outcome has not drastically shifted short-term expectations, it has slightly altered the outlook for future rate decisions. The probability of a further 25 basis point rate cut in December has decreased slightly from 77.3% to 67.2%, while the chance of the Fed holding rates steady has risen from 22% to 31.2%. Analysts note that the upcoming inflation data and jobs report could be crucial in shaping future Fed decisions.
The President-elect’s policies are expected to influence the broader economic environment. Trump’s focus on reducing interest rates and promoting fiscal stimulus has raised questions about the Fed’s future course, especially given his previous criticism of the central bank during his first term. While Trump has historically pushed for lower rates, it remains to be seen how he will navigate the relationship with Powell, whom he appointed but later clashed with over interest rate decisions.
Additionally, Trump’s proposed tariffs, including a 10% levy on all US imports and a 60% tariff on Chinese goods, could have long-term implications for inflation and interest rates. While tariffs could act as a political tool to curb trade deficits, they also risk increasing prices for American consumers, which might prompt the Fed to adjust its approach to rate cuts.
With input from Financial Times, the New York Times, FOX Business, and the Economic Times.
