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Federal Reserve Chairman Jerome Powell is set to address the nation following the conclusion of the Federal Open Market Committee’s (FOMC) meeting, where another interest rate cut is anticipated. Scheduled for Thursday, this meeting comes at a time when the economic landscape has become increasingly complex.
Financial markets are almost certain that the central bank will decrease the benchmark borrowing rate by 0.25%, aiming to recalibrate its policies in light of moderate inflation and a softening job market. However, the real focus will be on the Fed’s outlook as it adapts to the evolving economy and the political ramifications of Donald Trump’s unexpected presidential victory.
Krishna Guha, head of global policy and central bank strategy at Evercore ISI, suggests that Powell will likely refrain from making hasty judgments about the election’s economic implications. Instead, he aims to project stability and calm during this transitional period. Guha notes that Powell will emphasize the Fed’s commitment to thoroughly assess the new administration’s plans before making any decisions regarding monetary policy.
While the immediate action will involve executing the rate cut, which will adjust the federal funds rate to a range of 4.75% to 5.0%, market participants will be keenly interested in the Fed’s future guidance. The current market sentiment leans toward anticipating another quarter-point cut in December, followed by a pause in January, with further reductions expected throughout 2025.
If Trump’s proposed economic policies—such as tax reductions, increased public spending, and protective tariffs—are implemented, they could significantly impact the Fed’s approach. Many economists express concern that such isolationist measures could reignite inflation, which remained below 3% during Trump’s first term despite similar strategies.
During his presidency from 2017 to 2021, Trump was often critical of Powell and the Federal Reserve, advocating for lower interest rates to stimulate the economy. Quincy Krosby, chief global strategist at LPL Financial, points out that while the market is focused on future rate cuts, there is also a pressing question about whether inflation can truly be considered under control.
Responses to these questions will largely emerge from Powell’s post-meeting press conference. While the committee will announce its rate decision, it will not release an updated summary of economic projections (SEP), which includes forecasts on inflation, GDP growth, and unemployment, along with the individual rate expectations from FOMC members.
Looking beyond January, uncertainty looms regarding the Fed’s future direction. The SEP is expected to be updated again in December, but for now, Krosby highlights that discussions about the so-called “terminal rate” will gain traction. If bond yields continue to rise, this term might become more prominent in conversations about monetary policy, even as it is not solely tied to economic growth.
In the federal funds futures market, traders are anticipating a rapid series of cuts, projecting that the benchmark rate could drop to a target range of 3.75% to 4.0% by the end of 2025. This would represent a full percentage point decrease from the current level, following the anticipated 0.5% reduction in September. In contrast, the secured overnight financing rate suggests a more cautious outlook, with a potential short-term rate of around 4.2% by the close of next year.
A critical question remains: what will be the endpoint of this cycle of rate cuts? Bill English, a former head of monetary affairs at the Fed and now a finance professor at Yale, notes that soon the Fed will need to consider the implications of a robust economy on its rate-cutting strategy. He suggests that the central bank may wish to pause and assess how the economic landscape evolves.
Additionally, Powell may need to address the Fed’s ongoing efforts to reduce its bond portfolio. Since this process began in June 2022, the Fed has decreased its holdings of Treasuries and mortgage-backed securities by nearly $2 trillion. While Fed officials have indicated that balance sheet reductions can continue even amid rate cuts, market expectations suggest that this initiative may conclude as early as 2025.
English points out that while the Fed has kept this issue somewhat in the background, there will be heightened interest in future meetings regarding the pace of these asset run-offs and when further adjustments might be made.
As the Federal Reserve navigates these uncertain waters, the implications of economic policies and political developments will undoubtedly shape its decisions in the months to come. Investors and analysts alike are watching closely, anticipating how Powell and his team will respond to both current economic conditions and the broader political landscape.
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