Before the election, there was a near-unanimous expectation that the FOMC Rate Decision would result in a cut by 25bps at the conclusion of its policy meeting on Thursday. That expectation has only strengthened since then. While a Trump White House might have implications for yields and even monetary policy in the medium to long term, the short term dynamics seem to remain intact.
What that means for the potential market reaction is that the focus will be on the rhetoric that comes out of the FOMC Rate Decision, and particularly what kind of guidance Fed Chair Jerome Powell provides. Investors and analysts will be keen to see if there is any major change in not just the outlook, but the emphasis on inflation and the labor market.
Changes Are Slow
Central banks normally like to stay out of politics, but inflation was a major theme in the election campaign. Now President Elect Trump expressed disapproval of the way interest rates were handled, and even suggested he wanted more influence at the Fed. With Republicans gaining control of the Senate, Trump will likely have an easier time making appointments. But, that doesn’t mean he can arbitrarily change the rules.
The Chair of the Fed is appointed by the President, but Powell’s term isn’t up until 2026, and he will likely retain the position until then. Note that he was originally appointed by Trump and reconfirmed by Biden. Trump could influence the Fed by making appointments to the Board of Governors. However, there are likely no vacancies also until 2026. In any case, Trump won’t even assume office until January 20th, meaning that there will be two more meetings after this one under the Biden Administration.
The Focus Returns to the Data
The perception of the economy has improved since the Fed last met and cut rates by 50bps. At the time, Powell laid the groundwork for another rate cut at the upcoming meeting. The narrative was that the Fed was trying to get ahead of a slowdown in the labor market, as inflation has largely come under control.
Since then, NFP have shown quite a bit of variance. The summer reports were underwhelming, September beat expectations (but was revised lower), then October’s figure was distorted by the two Hurricanes as well as strikes. However, the unemployment rate remained relatively stable, and so did average earnings, suggesting that the labor market remained relatively tight. In other words, the Fed had reason to ease, but it wasn’t as urgent as perhaps was initially thought.
The Outlook Beyond
The Fed’s own projections for rates suggested that there would be quarter point cuts now in November, and again in December. But a Trump Presidency is understood to increase the chance of inflation remaining higher, due to tariffs and a more active economy. Therefore, the market is pricing in fewer rate cuts in the next year, translating into a stronger dollar in the near term.
Markets will likely be looking for any signs in the Fed’s statement about rates potentially staying higher, which would likely be interpreted as “hawkish”. But a reiteration of the position that the Fed held a month ago would now likely be seen as “dovish”, and weigh on the dollar. That could get an extra push if it coincides with a retracement as traders book gains from the recent moves.
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