Federal Reserve Set to Cut Interest Rates Again as Post-Election Uncertainty Rise

WASHINGTON — Federal Reserve officials are poised to cut key interest rates for the second time in a row on Thursday, responding to a persistent slowdown in inflation pressures that have irritated many Americans and contributed to Donald Trump’s presidential election victory.

However, since the election, the Fed’s future actions have become more uncertain, given that Trump’s economic proposals have been widely flagged as potentially inflationary. His election also raised the threat of White House interference in the Fed’s policy decisions, as Trump said that as president he should have a say in the central bank’s interest rate decisions.

The Fed has long maintained its status as an independent institution capable of making tough decisions about borrowing rates free from political interference. However, during his previous term in the White House, Trump publicly attacked Chairman Jerome Powell after the Fed raised rates to fight inflation, and he may do so again.

The economy also clouds the picture, sending mixed signals: growth rates are stable but hiring levels are declining. Despite this, consumer spending was healthy, fueling concerns that the Fed does not need to cut borrowing costs and that it could overstimulate the economy and even re-accelerate inflation.

Financial markets are presenting another challenge to the Fed, with investors pushing Treasury yields sharply higher after the central bank cut rates in September. The result has been higher borrowing costs across the economy, reducing the benefit to consumers from the Fed’s half-point rate cut it announced after its September meeting.

The average 30-year mortgage rate in the US, for example, fell in the summer when the Fed signaled a rate cut, but rose again once the central bank actually cut its benchmark rate.

Broader interest rates have risen as investors expect higher inflation, a larger federal deficit and faster economic growth under President-elect Trump. In what Wall Street called the “Trump deal,” stock prices also soared on Wednesday and the value of Bitcoin and the dollar rose. Trump talked about cryptocurrencies during his election campaign, and the dollar would likely benefit from higher rates and the across-the-board tariff hikes Trump has proposed.

Trump’s plan to impose at least a 10% tariff on all imports, as well as significantly higher taxes on Chinese goods and mass deportations of illegal immigrants, will almost certainly lead to higher inflation. This will reduce the likelihood that the Fed will continue to lower its key rate. Annual inflation, as measured by the central bank’s preferred gauge, fell to 2.1% in September.

Economists at Goldman Sachs estimate that Trump’s proposed 10% tariff, as well as his proposed taxes on Chinese imports and cars from Mexico, could bring inflation back to around 2.75% to 3% by mid-2026.

Such a hike would likely reverse the future rate cuts the Fed signaled in September. At that meeting, with policymakers cutting their key rate by a half-point to about 4.9%, officials said they envisage two quarter-point rate cuts later this year – one on Thursday and one in December – followed by four additional rate cuts. rate reduction in 2025.

But investors now see a rate cut next year as increasingly unlikely. The implied probability of a rate cut at the Fed’s meeting next January fell to just 28% on Wednesday, down from 41% on Tuesday and from nearly 70% a month earlier, according to futures prices tracked by CME FedWatch.

Jumping borrowing costs for things like mortgages and auto loans, even as the Fed cuts its benchmark rate, have created a potential problem for the central bank: Its efforts to support the economy by lowering borrowing costs may not bear fruit if investors take action to increasing rates on long-term borrowings.

The economy grew at a strong annual rate of just under 3% over the past six months, while consumer spending, fueled by higher-income shoppers, rose strongly in the July-September quarter.

At the same time, companies have limited hiring, and many people left unemployed are struggling to find work. Powell suggested that the Fed is cutting its key rate in part to support the labor market. But if economic growth continues at a healthy pace and inflation rises again, the central bank will come under increasing pressure to slow or stop cutting interest rates.