The first Federal Reserve decision after the election: Will future rate cuts be slower and fewer?

The Federal Reserve's interest rate cut on Friday is almost a foregone conclusion, but conflicting and unstable economic data, along with policy uncertainties following Trump's victory, have made the future path of rate cuts full of variables.

The market generally expects the Federal Reserve to continue its easing cycle in November, with all analysts predicting a 25 basis point rate cut, which aligns closely with the pricing in the money market, with a certainty of 99.8%.

In light of the presidential election on the 6th, the Federal Reserve's policy announcement has been delayed by one day and will be released at 3:00 AM Beijing time on Friday. Following that, Powell will hold a press conference at 3:30 AM.

Looking ahead to the future path of rate cuts, as Trump's policies are widely viewed as likely to bring inflation, the market pricing for the November and December meetings is less than 50 basis points.

Analysts believe that the Federal Reserve's statement is expected to emphasize that economic risks are "roughly balanced" and to maintain flexibility regarding the future path of interest rates. The market will closely monitor Chairman Powell's remarks, especially his views on the potential impacts of Trump's policies. Powell may reiterate the Fed's stance of flexibly adjusting policies based on data conditions.

Mixed Economic Data Since September Rate Cut

Since the rate cut in September, economic data has been mixed.

The third quarter U.S. GDP performed strongly, with economic activity continuing to expand, and core PCE inflation significantly easing over the past year.

However, the addition of only 12,000 jobs in October has raised concerns in the market, although the data was primarily affected by hurricanes and strikes, the Bureau of Labor Statistics noted that it could not quantify the exact impact of such events.

Citigroup believes that Fed Chairman Powell may maintain a dovish stance in his upcoming remarks, suggesting continued rate cuts, but will also emphasize data dependence to leave room for future policy adjustments.

The market expects that in the press conference following the rate decision, Powell will acknowledge the strong growth in third-quarter GDP and employment numbers. Compared to the last meeting, he will no longer overly emphasize the economic slowdown. It is expected that Powell will not provide specific guidance on the magnitude or pace of future rate cuts, as policy remains data-dependent, and the 50 basis point cut in September and the 25 basis point cut in November do not indicate future steps.

Trump's Policies May Increase Inflation

Many analysts believe that the policies proposed by Trump, including increased import tariffs and additional tax cuts, could reignite inflationary pressures, and these policies are likely to be more inflationary than Harris's policies. Therefore, Trump's victory could severely hinder the Federal Reserve's easing path.

Bank of America expects that the outcome of this U.S. election will have a significant impact on the Federal Reserve's future monetary policy. It is anticipated that Powell may emphasize in the upcoming press conference that the Fed will continue to make decisions based on data and maintain its established policy path, rather than commenting excessively on the policy agenda of the next administrationHowever, the bank believes that if the new government implements further fiscal expansion policies, the Federal Reserve may have to raise the federal funds rate target to a higher level to address potential inflationary pressures.

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

"It makes no sense to consider Trump's policies for Friday, 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.

It is worth noting that since the Federal Reserve first cut interest rates in September, the yield on 10-year U.S. Treasury bonds has risen by 80 basis points, suggesting that the market believes the Federal Reserve is making another policy mistake by triggering reflation through loose monetary policy.

What will the future easing path look like? Wall Street is cutting rate cut bets

90% of analysts surveyed by Reuters believe that the Federal Reserve will cut rates by another 25 basis points in December; by next year, the federal funds rate target will drop to 3.00%-3.25% or higher. The money market currently expects the Federal Reserve to cut rates by about 43 basis points by the end of the year, which means at least one 25 basis point cut, with an 80% chance of another cut.

HSBC predicts that in the next six FOMC meetings (including those in November and December 2024, as well as four meetings in early 2025), there will be a 25 basis point cut at each meeting, bringing the federal funds target rate range down to 3.25%-3.50% by June 2025.

However, after Trump was elected President of the United States, some major Wall Street banks lowered their bets on future rate cuts by the Federal Reserve.

JP Morgan economist Michael Feroli adjusted his forecast for the Federal Reserve's rate path, writing in a report on Wednesday that the Federal Reserve may cut rates by 25 basis points at both the meetings this month and in December, and then start quarterly cuts from March next year, meaning one cut per quarter until the federal funds rate reaches 3.5%.

JP Morgan believes that Trump's ability to reshape the Federal Reserve may only gradually materialize over time.

Economists like David Seif from Nomura continue to predict that the Federal Reserve will implement two more 25 basis point cuts this year. However, they are quite pessimistic about the Federal Reserve's rate cuts next year, with the latest expectation being only one cut next year, which is far below their previous estimate of four cuts next yearNomura raised its forecast for the Federal Reserve's terminal interest rate by 50 basis points to 3.625%