The Federal Reserve's interest rate cut in November was "not unexpected," but is Trump's shadow already looming over Powell?

Having previously intervened in Federal Reserve decisions, Trump is now "returning to power," and Federal Reserve Chairman Jerome Powell will have to answer a series of questions about the direction of economic growth, inflation, and borrowing costs after Trump's return to the White House.

At 3 AM Beijing time on Friday, the Federal Reserve will announce its interest rate decision, with the market widely expecting a 25 basis point rate cut; however, the key lies in what kind of policy guidance the Federal Reserve will provide. At 3:30 AM, Powell will hold a press conference, where he may try to appear unconcerned about politics, but given the stakes of the election and the potential for Trump's policies to alter the economic and inflation outlook, investors will be highly alert to related guidance.

Trump's victory has already triggered a frenzy of repricing in global financial markets, with increased bets on the "Trump trade"—faster economic growth and higher inflation. Long-term U.S. Treasury yields have risen nearly 20 basis points, while the U.S. stock market has reached historic highs, and the dollar has strengthened.

Trump has previously stated that he would impose tariffs on all U.S. imports and cut taxes across all areas, from corporate profits to overtime pay, policies widely seen as inflationary. He has also considered replacing the Federal Reserve leadership and claimed he has the right to comment on interest rates. During his first term, the Federal Reserve raised rates in 2017 and 2018, while Trump urged Powell to lower rates, breaking the White House's practice of avoiding comments on monetary policy.

As Trump's policy mix is brewing, Powell needs to assure global investors that the Federal Reserve can handle the impacts of Trump's second term. With the Republican Party likely sweeping Congress, market expectations for the path of monetary policy have already changed.

Wall Street is now cutting rate cut forecasts:

JP Morgan: Betting on rate cuts of 25 basis points this week and next month, but subsequent cuts will be less than priced in before the election;

Bank of America: If the new president significantly raises tariffs, the Federal Reserve may pause rate cuts;

Nomura: Inflation is expected to rise by 75 basis points by 2025, with the Federal Reserve expected to cut rates only once next year, compared to four cuts anticipated before the election.

The specific impact of policies on inflation is unclear, and the Federal Reserve needs to slow down

Michael Feroli, Chief U.S. Economist at JP Morgan, stated in an interview:

For Thursday, considering Trump's policies makes no sense, and it may not matter much for December either. But after December, things will become more complicated.

The Federal Reserve cannot know which of Trump's proposed policies will be implemented or in what order, but this alone is enough to make officials more cautious. When you are more uncertain, you may need to slow down.

Diane Swonk, Chief Economist at KPMG, expressed a similar view:

As we move into 2025, policies will affect the Federal Reserve, but they can only react after policies are finalized. They will emphasize that any outcome of the election actually depends on how policies evolve and how they impact the economy.” Most economists believe that increasing tariffs on imported goods in the United States and tax cuts to stimulate consumer demand will lead to inflation. If the Republicans, who have already won the Senate, continue to control the House of Representatives, the ability to implement Trump’s policies will be strengthened, and all of this means that Federal Reserve meetings may become more unpredictable.

The post-pandemic inflation experience has made the Federal Reserve more sensitive to the risks of rising prices, and any signs of inflation re-accelerating will mean that the Federal Reserve will either slow down the pace of interest rate cuts or completely abandon rate cuts, with rates not being as low as previously predicted.

Additionally, it is worth mentioning that the Federal Reserve is not the only central bank that will have to respond to Trump being re-elected president, which will force other central banks to react. This week, about 20 central banks globally (accounting for more than one-third of global GDP) will make interest rate decisions, including the Bank of England and the Sveriges Riksbank, both of which are expected to cut rates.

Luis de Guindos, Vice President of the European Central Bank, stated that if Trump continues to fulfill his tariff commitments, the world will face shocks to economic growth and inflation. Furthermore, rising inflation and interest rates in the United States often attract capital away from emerging markets