Fed Cuts Rates But Trump's Re-Election Casts Shadow Over Future Policy

The Federal Reserve on Thursday lowered interest rates by a quarter percentage point, marking the second consecutive rate cut as the central bank continues to support the US economy. However, the re-election of Donald Trump, known for his criticism of the Fed and his potential to influence monetary policy, has cast a shadow over the future path of interest rates, reports Bloomberg.

Following the Fed's decision, Chair Jerome Powell emphatically stated he would not resign if asked to do so by Trump, emphasizing that removing or demoting Fed leaders is "not permitted under the law."

Powell asserted that the US presidential election will have "no effects" on the central bank's immediate policy decisions, acknowledging the uncertainty surrounding Trump's potential fiscal policy changes.

The Fed's unanimous decision to lower the federal funds rate to a range of 4.5% to 4.75% follows a half-point reduction in September, reflecting efforts to maintain economic growth and curb inflation.

"This further recalibration of our policy stance will help maintain the strength of the economy and the labor market and will continue to enable further progress on inflation as we move toward a more neutral stance over time," Powell said.

"It's a process that takes some time," he added.

Trump's return to the White House, along with his promise to enact more aggressive tariffs, crack down on immigration, and extend tax cuts, could potentially push inflation and long-term interest rates higher, potentially forcing the Fed to reconsider its rate-cutting strategy.

"We don’t know what the timing and substance of any policy changes will be," Powell said. "We therefore don’t know what the effects on the economy would be, specifically whether and to what extent those policies would matter for the achievement of our goal variables: maximum employment and price stability."

The Federal Open Market Committee (FOMC) stated that it continued to see the risks to achieving its employment and inflation goals as "roughly in balance." The committee also modified its language regarding the labor market, noting that "labor market conditions have generally eased, and the unemployment rate has moved up but remains low."

The Fed's recent rate cuts come amidst a robust US economy, with GDP expanding at a 2.8% annual rate in the third quarter, fueled by strong consumer spending.

While inflation has eased significantly, progress has been uneven, with the rate of price increases falling to 2.1% in September, just above the central bank's 2% goal. The Fed's preferred gauge of underlying inflation, however, saw its largest monthly gain since April.

Traders anticipated a quarter-point rate cut on Thursday, with futures markets indicating a high likelihood of another similar cut in December.

Treasury yields have surged in the run-up to the election, pushing up mortgage rates in a cooling housing market. The S&P 500 climbed to a record high following Trump's victory.

Powell acknowledged the upward trend in longer-term bond yields, attributing it to perceptions of stronger growth. He also stated that bond rates would need to remain elevated before the Fed could make a definitive assessment of their economic impact.