Fed cuts rates again, but Trump inflation worries the loom

On November 8, 2024By Littum

Upper line

The Federal Reserve cut the federal funds rate for the second straight time on Thursday, but the economic policies pursued by President-elect Donald Trump have some economists questioning the path of interest rates heading into next year.

Fed Chairman Jerome Powell, right, with President-elect Donald Trump in 2017.

AFP via Getty Images

Key facts

At the end of the policy-making Federal Open Market Committee’s two-day meeting, the central bank announced it cut the federal funds rate by 25 basis points to 4.5% to 4.75%, the lowest level since March 2023.

The announcement comes on the heels of the central bank’s September meeting, where the Fed announced the first rate cut since March 2020 and rolled out an overall 50 basis point move.

Both economists and investors strongly expected the 0.25 percentage point cut on Thursday, when CME Groups FedWatch toolwhich tracks derivative contracts that bet on the federal funds rate, priced in a 99% chance of the magnitude of a cut.

How will Trump affect the Fed?

While this week’s move by the Fed didn’t bring much drama, economists at major banks noted after this week’s election that there is increased variability going forward, potentially jeopardizing the pace and scale of further rate cuts. “The various political uncertainties could cause the Fed to move more slowly than it would otherwise,” JPMorgan Chase’s chief U.S. economist Michael Feroli wrote in a note to clients on Wednesday, predicting a rate cut per quarter until it reaches 3.5%. Bank of America’s senior US economist warns that Trump’s aggressive tariff proposals “could derail the Fed’s tapering cycle” and the Fed will decline to cut rates further if higher import taxes are announced, noting that the Fed “will err on the side of caution” in evaluating the inflationary effects of tariffs. And Deutsche Bank’s chief U.S. economist Matthew Luzzetti notes that it’s a “hawkish” outlook for the Fed heading into 2025, nodding to the potential for “sticky” inflation due to tariffs.

big number

4% to 4.5%. That’s where Luzzetti expects the Fed-set rate to end next year, close to a full percentage point higher than the median of 3.4% forecast shared by Fed staff in September.

Key background

It has been a whirlwind four years for monetary policy. The Fed cut interest rates to near zero in March 2020 in response to the sudden economic shock of the COVID-19 lockdowns. It then raised rates in 2022 and 2023 to a two-decade high above 5% in response to rising inflation, and in the second half of this year moved toward cuts as inflation eased. The central bank sets the target federal funds rate, which only officially determines borrowing costs in transactions between financial institutions, but has a large influence on lending rates across the country. This means that lower interest rates typically help stimulate the economy, as consumers and corporate borrowers are more likely to take on cheaper debt. But the Fed’s rate cut in September did not have the desired effect, as Treasury yields, which serve as a proxy for market expectations of Fed policy, have actually risen sharply. This week’s upward move in interest rates appears to be linked to inflation concerns stemming from Trump’s proposed tariffs, which economists largely agree will boost consumer prices, but it is also a reflection of increased faith in the strength of the broader US economy, as better economic conditions make the need for stimulating speed reductions less urgent.

Surprising facts

Mortgage rates rose this week to the highest level in three months, with the 30-year average mortgage rate hitting 6.79%, according to to the federal government-backed lender Freddie Mac. That’s about 70 basis points higher than mortgage rates were in the week after the September rate cut, a reflection of the rise in 10-year U.S. Treasury yields.

Key

Despite the pair’s fraught history, Trump intends to let Powell finish out his term at the top of the Fed, which ends in 2026, CNN reported Thursday, citing an anonymous adviser to the president-elect. Trump said in August, he believes “the president should at least have some influence” on interest rates, a claim that would break precedent for the independently run Fed.

Crucial quote

“The Fed will be even more important in 2025 than it is today, if you could even imagine it,” Siebert chief investment officer Mark Malek declared in an emailed comment.