The US Federal Reserve made a cautious but decisive decision this week, lowering its target interest rate by 25 basis points to a range of 4.50 to 4.75 percent, signaling a cycle of easing continuous but measured policy.
That marked another step toward supporting the economy as inflation moves closer to the Fed’s 2 percent target. However, economists warn that an air of uncertainty hangs over future rate cuts with the recent election of President-elect Donald Trump, whose policies could alter the economic landscape.
Commenting on the Fed’s decision, CBA chief economist Stephen Halmarick said the big four banks share the widely held view that new President Trump’s policy agenda, including tax cuts and tariffs, poses upside risks to the US inflation outlook. .
“As a result, we have adjusted the expected low point of this Fed easing cycle upward by 50 basis points, from 3 to 3.25 percent to 3.5 to 3.75 percent,” he said. Halmarick said.
“We continue to expect a 25 basis point rate cut at the December 2024 FOMC meeting and additional 25 basis point moves in early 2025, but as policy easing ends around mid-2025.”
During the post-meeting press conference, Fed Chairman Jerome Powell said he and the Federal Open Market Committee (FOMC) would not prejudge the economic and inflationary impact of the program Trump’s policies, but that they would evaluate the data as they come – remembering that President-elect Trump will not be sworn in until January 20, 2025.
Additionally, when asked if he would consider resigning under pressure from Trump, Powell was resolute, saying he had “no intention of resigning,” sending a clear message about autonomy of the Fed.
Reflecting on Trump’s intention to reshape the Fed by changing its dual mandate and influencing rate setting, Halmarick noted that, despite Republican control of Congress, enacting such changes “would be difficult.”
“President Trump’s ability to ‘take control’ of the Fed and reduce its independence is therefore limited in the short term. But as with everything that happens under the Trump presidency, that probably won’t stop him from making his own thoughts on the level and outlook for interest rates very clear, which, as noted, could increase volatility and uncertainty in financial markets,” Halmarick said.
Similarly, Seema Shah, chief global strategist at Principal Asset Management, observed that Trump’s potential policy changes lead to some uncertainty, particularly around trade and fiscal policy.
With improving economic data and higher-than-expected inflation numbers, she noted that there is now less certainty about the Fed’s path for future cuts.
Markets, which were once certain of another rate cut next month, now see about a 60 percent chance of that happening.
“Beyond December, the direction of rates is very uncertain,” Shah said.
“In addition to considerations around the neutral rate, the Fed may need to take into account the impact of policy proposals on inflation and growth. However, as things stand, investors and the Fed still lack clarity on the timing and magnitude of policy proposals, suggesting a prolonged period of uncertainty over the Fed’s future rate direction. .”
