Beware of more dissenting votes from the Federal Reserve!

Analysts generally believe that the Federal Reserve will not adjust its policy path due to the latest results of the U.S. presidential election and is expected to announce a 25 basis point rate cut tonight. The focus of this meeting will be on whether to slow the pace of rate cuts in the coming meetings.

The Federal Reserve cut rates by 50 basis points to 4.75%-5.0% in September, ending a period of over a year of unchanged rates. Powell has insisted that future rate cut decisions will depend on the latest data. Economic data since September has been mixed, but overall performance has exceeded expectations.

Federal Reserve officials have generally stated in recent speeches that inflation is gradually approaching the Fed's 2% target, while signs of a slowdown in the labor market provide support for continued rate cuts. Officials also emphasized that the ultimate level of interest rates and the path to achieving it remain uncertain and will depend on future data performance.

According to the dot plot released in September, Federal Reserve policymakers expect a total of 100 basis points of rate cuts in 2024 and another 100 basis points in 2025. After the November meeting, the Federal Reserve will hold another meeting on December 17-18, with the futures market currently indicating a 70% chance of a further 25 basis point rate cut and a 30% chance of keeping rates unchanged, i.e., "skipping" a rate cut.

It is noteworthy that as of this Wednesday, the five-year expected inflation rate reflected by the prices of regular U.S. Treasuries and Treasury Inflation-Protected Securities (TIPS) was 2.45%, compared to about 1.9% in mid-September. Long-term U.S. Treasury yields have also been rising. On Wednesday, the yield on the 10-year U.S. Treasury rose to 4.46%, an increase of 80 basis points since mid-September. This is a significant change for the bond market, which is currently experiencing the highest level of volatility in over a year, with the ICE BofAML MOVE Index reflecting bond market volatility also at its highest level in over a year.

Powell and his colleagues may express concerns about the recent rise in yields, as it contradicts their easing goals. Therefore, Ed Yardeni, president of Yardeni Research and economist, expects that there may be more votes against rate cuts at this week's Federal Reserve meeting. Previously in September, Governor Bowman cast the only dissenting vote, leaning towards a 25 basis point rate cut.

"Given the strong economic performance, dissenters may be temporarily unwilling to counter the 'bond vigilantes,' thus voting against a rate cut," Yardeni wrote,

"Even with strong economic growth, they may still worry that the U.S. election results will lead to a continued expansion of the federal budget deficit, but they will not directly comment on fiscal policy."

"I think they may want to set a ceiling for yields," said Adam Abbas, head of fixed income at investment firm Harris | Oakmark,

"I believe Powell will emphasize the trends of slowing housing inflation, decelerating wage growth, and increasing labor supply." Before the December meeting, Federal Reserve officials will also see the inflation data for October and November, as well as the non-farm payroll report for November. If the data exceeds expectations, it could intensify the debate over whether to cut interest rates in December. At that time, officials will also update the economic projections summary and the dot plot, providing guidance for the policy path in 2025 and beyond.

“We believe it is not the right time to discuss skipping a rate cut,” wrote Tim Duy, chief U.S. economist at SGH Macro Advisors.

“If the Federal Reserve is to skip or pause in this rate-cutting cycle, it is more likely to occur in January next year rather than December this year... If economic growth remains strong and the labor market performs solidly, then the Federal Reserve could signal a slowdown in the pace of rate cuts, thereby pushing the discussion of pausing rate cuts to 2025.”

By then, there may be more understanding of Trump 2.0's economic policies, many of which could raise inflation or affect long-term discussions on interest rates. For now, officials believe that policy remains restrictive, leaving ample room for rate cuts. Since the Federal Reserve's September meeting, bond yields have surged significantly due to increased economic growth expectations, accelerating inflation, and a widening federal deficit. All of these could prompt the Federal Reserve to slow its easing pace in the future.

Of course, do not expect Powell to discuss in detail the potential policies of a second Trump term at the press conference. Federal Reserve officials will wait until policies are implemented and their effects are reflected in economic reports or surveys before considering adjustments to the interest rate path. Powell may also strongly reiterate his defense of the Federal Reserve's independence. Trump has stated that he believes the president should be able to influence central bank decisions, saying, “I think the president should at least have a say in it, and I firmly believe that.”

During his first term, Trump frequently clashed with Powell and even discussed replacing the Federal Reserve chairman. However, recently, the presidential candidate has indicated that he will not seek to remove Powell before his term ends in May 2026