The Federal Reserve’s decision will be vital today. The meeting, due to the US elections, was postponed by one day. In the short term, the Federal Reserve is unlikely to change its previously set course and will implement today a reduction of interest rates by 25 basis points.
The Fed has almost fully accomplished its mission. Inflation has come close to the target, which caused the American institution to shift its attention to the labor market. The situation here appears to be quite favorable (the unemployment rate still remains low) although last week’s report could ignite a yellow warning light despite the weak employment change in the non-agricultural sector (12k) being attributed to hurricanes and worker strikes. The situation is cooling down gradually, so the Fed may continue the cycle of interest rate cuts started in September.
The market, after electing Trump, made a minor change in its expectations regarding the Fed’s monetary policy this year. It is still assumed that there will be a reduction slightly less than 50 pb. However, a change was noted in the perception of what the Federal Reserve could do in 2025. The market began to doubt whether the Fed would soften its monetary policy significantly, as this would probably not be allowed due to the new President’s planned inflationary fiscal actions. Therefore, the Fed will act cautiously, avoiding excessive movements. Considering the rise in the USA’s GDP in the third quarter, it can be seen that the economy is not “up against the wall”, not creating much pressure on the central bank. Furthermore, the recent decline in core inflation has slowed.
The election results will only become significant for the Fed in 2025 when Trump takes office in January. The main question then will be which of the announced economic plans (tariff increases, tax cuts) Trump can and will implement, and how Powell will react to these actions. If there were attempts to attack the independence of the Federal Reserve from the political side, the markets could react very sensitively. Concerns could even arise from verbal statements from the White House alone. The dollar may lose in the future if it appears that the Fed may only react limitedly to the risk of price increases again. This issue remains for now only in the realm of far-reaching speculation but should not be completely forgotten.
Author: Łukasz Zembik, Oanda TMS Brokers
Source: https://managerplus.pl/relacja-na-linii-fed-trump-na-nowo-wraca-96495
