The Fed's Interest Rate Decision Amidst Political Change: What's at Stake?
As the Federal Reserve gears up for its interest rate decision on Thursday, November 7, markets are widely anticipating a 25bps cut, which would bring the target range for the Federal Funds Rate to 4.50-4.75%. This move aligns with current money market pricing, reflecting a 99% probability, and consensus from surveyed analysts. However, with the recent outcome of the U.S. elections—Donald Trump winning the presidency—there is a renewed focus on how this change in administration might impact future Fed decisions.
Election Implications on Rate Policy
Trump’s victory has introduced an inflationary undertone to economic expectations. His proposed policies, including increased government spending, tax cuts, and potential import tariffs, are generally seen as inflationary, pushing the USD higher and reinforcing higher rate expectations. The expectation is that Trump’s policies will necessitate a more cautious approach from the Fed on easing. Even as the Fed proceeds with a rate cut this week, Chair Jerome Powell’s language around the inflationary risk posed by the new administration will be critical for guiding future rate expectations.
Meeting Expectations and Potential Surprises
While a 25bps cut is almost certain, without the Fed’s Summary of Economic Projections (SEP) in this meeting, any forward guidance will need to be deciphered directly from Powell’s remarks. Should Powell hint at a “higher-for-longer” approach, reflecting inflation concerns tied to Trump’s policies, the USD may strengthen further, putting pressure on EUR/USD as traders adjust for a more sustained period of elevated rates. Conversely, should there be no rate cut, it would signal a more hawkish Fed stance, potentially leading to significant EUR/USD selling.
Implications for Treasury Yields and the Broader Market
With the Fed maintaining a steady easing rhythm—25bps cuts per meeting—Treasury markets are likely to remain steady, with the 2-year yield expected to hover in the 3.75-4.00% range and the 10-year yield maintaining an upward tilt around 4.25%. The structure of the yield curve may continue to steepen, especially if the Fed signals limited easing in light of fiscal support. If there is a strong dovish signal, however, we could see more selling in the dollar, potentially benefiting EUR/USD.
Conclusion: Market's Balancing Act with Fiscal and Monetary Policies
The Fed faces a unique challenge balancing its rate policy against the potentially inflationary fiscal environment that a Trump administration may bring. With fiscal policy likely to lean expansionary, the Fed may feel compelled to keep rates at somewhat restrictive levels to achieve its 2% inflation target, even as it looks to avoid derailing economic momentum. As Powell navigates this delicate balance, expect markets to react sharply to any nuanced guidance, particularly in the context of Trump’s plans and how they might influence inflation and growth.