The Federal Reserve lowered the federal funds rate for the second consecutive time on Thursday. This move comes amid ongoing economic developments and shifting market conditions.
However, the economic policies being proposed by President-elect Donald Trump are raising concerns among some economists. They question how these policies may impact the trajectory of interest rates in the coming year.
As Trump prepares to take office, many are uncertain about how his approach to fiscal and trade policies could influence inflation and economic growth. This has led to further speculation on the Federal Reserve’s future actions regarding interest rates.
While the rate cut may provide short-term relief, experts are divided on whether the Fed’s current course will continue if inflationary pressures rise due to the new administration’s potential economic plans.
These uncertainties are prompting economists to carefully analyse how President Trump’s policies could shape the overall economic landscape, potentially influencing future rate decisions by the Federal Reserve.
Key Facts
At the conclusion of the policy-setting Federal Open Market Committee’s two-day meeting, the central bank revealed that it had cut the federal funds rate by 25 basis points, bringing it down to a range of 4.5% to 4.75%. This marks the lowest level since March 2023.
The announcement follows the central bank’s September summit, where the Fed implemented its first rate cut since March 2020, opting for a supersized 50 basis-point reduction.
Economists and investors alike had closely anticipated the 0.25 percentage-point cut on Thursday. This expectation was reflected in the CME Group’s FedWatch Tool, which tracks derivatives contracts betting on the federal funds rate, and indicated a 99% chance of such a move.
Powell Says He Won’t Resign
In a press conference following the announcement of the rate cut, Fed Chairman Jerome Powell was asked whether he would resign if President-elect Donald Trump requested it. Powell’s response was blunt, stating simply, “no.” He went on to add that it is “not permitted under the law” for the president to remove him or other governors of the central bank.
Powell and Trump have shared a contentious history, particularly since Trump appointed Powell to the top role at the Federal Reserve in 2017. In 2019, Trump labelled Powell an enemy after a disagreement over rate cuts. Moreover, in August, Trump stated that the “president should have at least say” on interest rates, a claim that would break with the tradition of the Fed’s independence.
However, according to a report from CNN on Thursday, Trump intends to allow Powell to serve out his term at the helm of the Fed, which is set to conclude in 2026. This information came from an anonymous adviser to the president-elect.
How Will Trump Impact The Fed?
Though this week’s decision from the Federal Reserve to cut rates didn’t generate much controversy, economists at major banks have noted that the outcome of this week’s election introduces additional uncertainty, which could potentially impact the pace and magnitude of future rate cuts.
JPMorgan Chase’s chief U.S. economist, Michael Feroli, commented in a note to clients that the policy uncertainties could lead the Fed to proceed more cautiously than originally planned. He predicts that the central bank will make one rate cut per quarter, gradually bringing the rate down to 3.5%.
Bank of America’s senior U.S. economist also highlighted the risks posed by President-elect Trump’s aggressive tariff proposals. He cautioned that such measures could disrupt the Fed’s rate-cutting cycle. In particular, the economist suggested that the Fed might refrain from lowering rates further if significant import taxes were announced, as the central bank would be careful in assessing the potential inflationary impacts of tariffs.
Furthermore, Deutsche Bank’s chief U.S. economist, Matthew Luzzetti, suggested that the Fed’s outlook for 2025 is likely to be “hawkish,” anticipating that inflation could become more persistent due to the introduction of tariffs.
Surprising Fact
Though this week’s decision from the Federal Reserve to cut rates didn’t generate much controversy, economists at major banks have noted that the outcome of this week’s election introduces additional uncertainty, which could potentially impact the pace and magnitude of future rate cuts.
JPMorgan Chase’s chief U.S. economist, Michael Feroli, commented in a note to clients that the policy uncertainties could lead the Fed to proceed more cautiously than originally planned. He predicts that the central bank will make one rate cut per quarter, gradually bringing the rate down to 3.5%.
Bank of America’s senior U.S. economist also highlighted the risks posed by President-elect Trump’s aggressive tariff proposals. He cautioned that such measures could disrupt the Fed’s rate-cutting cycle. In particular, the economist suggested that the Fed might refrain from lowering rates further if significant import taxes were announced, as the central bank would be careful in assessing the potential inflationary impacts of tariffs.
Furthermore, Deutsche Bank’s chief U.S. economist, Matthew Luzzetti, suggested that the Fed’s outlook for 2025 is likely to be “hawkish,” anticipating that inflation could become more persistent due to the introduction of tariffs.
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