The U.S. Federal Reserve is expected to lower its key interest rate by 0.25 percentage points on Thursday, signalling a cautious approach in its battle against inflation. However, this decision may feel secondary compared to the broader economic uncertainties now in play following Donald Trump’s election win.
With Trump’s return to power and the Republicans potentially taking control of both chambers of Congress, new policies on tariffs, taxes, and immigration could fundamentally alter the landscape for economic growth and inflation, putting the Fed in uncharted waters.
While proposals from the new administration may take months to fully unfold, the bond market has already reacted, and investors now foresee less aggressive rate cuts than initially expected. The anticipated changes in fiscal policy could lead to higher deficits and inflation, with short-term growth gains that may bring their own risks.
TS Lombard’s Chief U.S. Economist, Steven Blitz, highlighted that the Fed may find itself in a difficult position, balancing inflation control with rising prices and unemployment. Trump’s first term saw him clash with the Fed, accusing it of stifling growth with rate hikes, and this relationship could continue to be a point of tension.
The Fed’s Next Moves Remain Uncertain
A 0.25 percentage point reduction is expected to bring the Fed’s rate to between 4.5% and 4.75%. This would follow the 0.5 percentage point cut from September. However, the market’s outlook for the future has shifted, with expectations that the Fed may halt further cuts by mid-2025, leaving rates between 3.75% and 4%, well above earlier predictions.
Trump, who once railed against Powell’s interest rate hikes, may continue to press for lower rates as part of his broader economic agenda. But the long-term effects of his proposed tax cuts, tariffs, and other fiscal policies will create a more complicated environment for the central bank to navigate.
The Fed has kept rates high to bring inflation back to its 2% target, but the administration’s economic proposals could make that goal harder to achieve. As Trump’s policies unfold, it may be months before the true impact on growth, jobs, and inflation becomes clear.
Credit: Reuters (Text Excluding Headline)
