Key Points
- The Fed will likely reduce rates by 0.25%, setting the benchmark between 4.5% and 4.75%. Trump’s victory introduces potential economic shifts.
- Bond yields have risen, signaling expectations of higher growth and inflation. The Fed may stop cutting rates by mid-2025, with a final target of 3.75%-4%.
- Potential Trump policies, like tariffs and tax cuts, could complicate Fed strategies on inflation and growth.
- Despite new uncertainties, the Fed aims to sustain tight monetary policy to achieve its 2% inflation target.
The U.S. Federal Reserve is anticipated to reduce its benchmark interest rate by a quarter percentage point after its policy meeting on Thursday, moving it to a range between 4.5% and 4.75%. While the cut is largely expected, former president Donald Trump’s recent electoral victory and potential Republican control of Congress add new uncertainties to the Fed’s outlook on growth and inflation.
Trump’s potential policy changes, including possible tax cuts, tariffs, and immigration restrictions, could reshape the economy, driving higher growth and inflation in the near term and bringing long-term risks. Bond yields have already risen since the election as investors recalibrate for what could be a different economic trajectory.
Consequently, market expectations for further Fed rate cuts have diminished, with the cutting cycle now anticipated to conclude by mid-2025. Projections suggest a final policy rate between 3.75% and 4%, a significant shift from the 2.9% target the Fed had forecast in September.
Under Trump’s first term, the Fed raised rates amid strong growth from his tax cuts but faced challenges as trade tensions slowed global growth. Trump repeatedly called for lower rates during his term, even branding Fed Chair Jerome Powell an “enemy” for rate hikes he deemed excessive. Although Powell’s current term extends to 2026, his relationship with the administration will be closely observed as the central bank faces renewed pressure to support Trump’s economic agenda without sacrificing inflation control.
The Fed, focused on its 2% inflation target, will likely continue its disinflationary efforts. However, any proposed tariffs, tax cuts, or regulatory shifts could complicate the Fed’s work by altering global supply chains and influencing demand, wages, and deficits in unpredictable ways. According to TSLombard Chief U.S. Economist Steven Blitz, deficits and trade policies “can become a problem” for the Fed, as it may need to respond to rising prices while also managing unemployment.
While Fed officials avoid setting policy in response to any administration’s plans, they must react to the broader economic outcomes these policies create. Past experiences with Trump-era policies may inform the Fed’s approach, but the effects of new policies remain uncertain. Economists David Doyle and Chinara Azizova of Macquarie note that, after Thursday’s anticipated rate cut, the Fed’s path is now increasingly uncertain, with future moves depending on both incoming data and Trump’s economic strategies in 2025.
