On November 6, the two-day Federal Reserve monetary policy meeting began in Washington.
According to economists surveyed by FactSet, the Fed is expected to cut interest rates by 0.25 percentage points, half the size of the September rate reduction. This would lower the federal funds rate from its current range of 4.75%-5% to 4.5%-4.75%.
Market attention will likely turn to the policy statement and Chairman Powell's press conference, where investors will seek guidance on the Fed's future stance on monetary policy. Notably, this is the first meeting following Trump's victory, and the market may pay closer attention to how his presidency could influence future Fed policy decisions.
Wall Street Cheers Trump's Win, But Stocks May Wobble if Fed Reconsiders Rate Cuts
U.S. stock markets surged after former President Donald Trump triumphed over Vice President Kamala Harris, securing the position to succeed President Joe Biden next year.
Following the outcome, equity markets surged. Trump's focus on corporate tax cuts, deregulation, and deal-making likely fueled the rally. The S&P 500, a key market benchmark, jumped 2.45% on the day, marking its strongest one-day performance in eight months, and reaching a new all-time high.
This optimism in the stock market contrasts sharply with the signals emerging from the bond and currency markets. Treasury yields surged, particularly at the longer end of the yield curve, while the U.S. dollar strengthened significantly against major currencies.
The market moves suggest expectations of a rapid inflation rebound under the new administration, which could limit the Federal Reserve's ability to lower interest rates. Trump's track record of supporting tax cuts to increase the deficit, along with his aggressive trade policies—including his affinity for tariffs—reinforce this outlook.
So the market is likely to focus more closely on Powell's wording. If he and his colleagues adopt a more hawkish tone, suggesting that they may reconsider the rate-cut path if inflation rises, U.S. Treasury yields and the dollar could climb. This would place pressure on the credit markets, and the current optimism in the stock market could potentially reverse.
U.S. Economic Resilience May Keep the Fed Cautious
Since the last Federal Reserve meeting, a series of important economic data points have shown that the U.S. economy remains resilient overall. The latest data from the S&P Global PMI and the ISM survey, both of which measure the health of the manufacturing and services sectors, came in better than expected, signaling strong economic momentum at the start of Q4. After the initial GDP estimate for Q3 showed growth of 2.8%, the Atlanta Fed's GDPNow model now forecasts a 2.4% growth rate for the current quarter, still well above the long-term trend rate of 1.8%.
While overall inflation is approaching the Fed's target, core inflation remains a concern. The PCE index for September has dropped to 2.1%, but the core PCE, excluding food and energy, has remained at 2.7% for three consecutive months, indicating some persistent inflationary risks.
Many analysts believe that with commodity prices stabilizing, service sector prices could become the next inflationary challenge. Bob Schwartz, Senior Economist at Oxford Economics, stated that inflation remains the top concern for voters, and the path to sustained 2% inflation will be long and difficult.
Bill Adams, Chief Economist at Comerica Bank, noted that while overall inflation has slowed to near the Fed's target, the persistent rise in core inflation could still influence the Fed's actions. "The Fed may opt for a 25-basis point rate cut after the election," he said, but he added that the central bank must remain vigilant as core inflationary pressures have not fully abated.
What's the Outlook for Interest Rate Policy in the 'Trump 2.0'?
Ahead of this meeting, market observers have noted signs of division within the Federal Reserve, highlighted by a dissenting vote in the September meeting. Atlanta Fed President Bostic suggested that the November meeting could skip a rate cut.
While the overall stance of monetary easing remains unchanged, differing interpretations of economic data present a significant challenge for Fed Chairman Jerome Powell.
Lindsey Piegza, Chief Economist at Stifel, believes the divisions within the Fed are greater than the public perceives. Some officials are concerned that inflation is still rising and are cautious about rapid rate cuts, while others worry about a potentially weaker labor market, increasing the need for more aggressive rate cuts.
Additionally, the impact of the U.S. presidential election results cannot be ignored. The next administration's tax, trade, and immigration policies will play a significant role in shaping the economy in the coming years. In a recent report, Bank of Montreal noted that import tariffs and other policies could affect both the economy and inflation, with the Fed needing to adjust its policy stance accordingly.
After Trump's victory announcement, Federal funds futures now show a 70% chance of a 25-basis point rate cut in December, down from previous expectations. The Fed may also reach the end of this easing cycle in June next year, with the federal funds rate at 3.75%-4%. If this scenario unfolds, it would mean that this rate-cutting cycle would conclude more than a year earlier than initially expected, with a full percentage point higher than the forecasts provided by most Fed policymakers after the September rate cut.
During his campaign, Trump promised to address what he sees as economic challenges, planning higher tariffs, tax cuts, and slower immigration. Many Wall Street institutions believe these policies could temporarily boost economic growth and tighten the labor market, while higher import costs will put upward pressure on prices, potentially limiting the scope for further monetary easing.
Source: CME