For now, the US presidential election results haven’t shifted the Federal Reserve’s plans.
As widely expected, the central bank cut the federal-funds rate by 0.25 percentage points to a target range of 4.50%-4.75%. The Fed has cut a cumulative 0.75 points since it started lowering rates in September 2024. Before that, the target had been on a lofty plateau of 5.25%-5.50% since July 2023.
Now investors are trying to glean insights on the Fed’s mindset for future rate cuts. Expectations have shifted significantly in the past two months. As of early September, market participants thought the federal-funds rate would drop to 2.75%-3.00% by the end of 2025 and remain there in the following years. But they now expect a year-end 2025 rate of 3.75%-4.00%, a full 100 basis points higher.
The main reason for this shift is that concerns about a weakening economy and labor market have diminished. In particular, recession worries cropped up with the rise in the unemployment rate through August 2024, but unemployment has ticked down in the last two months’ job reports. Likewise, strong GDP growth in the third quarter and other data have shown the economy growing at a solid pace.
Another factor in the change in expectations is Donald Trump’s electoral victory. Trump’s proposed tariffs could create a rise in inflation. Also, a Republican Party sweep of Congress would create the possibility of more deficit spending via tax cuts and defense. Both scenarios would call for a more restrictive monetary policy.
Regarding the Fed’s next meeting in December 2024, the market-implied probability of a 25-point rate cut is about two-thirds, while there’s a one-third probability of no cut.
Fed Chair Jerome Powell was fairly reticent on the election. He said it would have “no effect” on decisions in the near term, and that the central bank would wait until new government policies are in place before making any adjustments to monetary policy. He said acting based on speculation about policy would be inappropriate.
Elsewhere, Powell refrained from giving much guidance on the future course of rate cuts. He reiterated that the Fed will not provide “forward guidance” at the moment, meaning it won’t actively seek to shape market expectations. Instead, the central bank is letting expectations fall where they may and making decisions on a meeting-by-meeting basis.
Following Powell’s lack of firm guidance, market expectations for a rate cut at the December Fed meeting didn’t move much today. Nor did bond yields (reflecting future rate cuts) move much. We currently expect the Fed to cut its target rate range by 25 basis points in December.
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