The US Federal Reserve made a cautious yet decisive move this week, cutting its target interest rate by 25 basis points to a range of 4.50-4.75 per cent, signalling an ongoing but measured policy easing cycle.
This marked another step towards supporting the economy as inflation edges closer to the Fed’s 2 per cent target. However, economists warn an air of uncertainty looms over future rate cuts with the recent election of President-elect Donald Trump, whose policies could alter the economic landscape.
Commenting on the Fed’s decision, CBA’s chief economist Stephen Halmarick, said the big four bank shares the widely held view that the policy agenda of the returning president Trump administration, including tax cuts and tariffs, presents upside risks to the inflation outlook in the US.
“As a result, we have adjusted higher by 50bp the expected low point in this Fed easing cycle from 3 – 3.25 per cent to 3.5 to 3.75 per cent,” Halmarick said.
“We continue to expect a 25bp rate cut at the December 2024 FOMC meeting and further 25bp moves in early 2025, but an end to policy easing around mid-2025”.
During the post-meeting press conference, Fed Chair Powell stated that he and the FOMC will not pre-judge the economic/inflationary impact of Trump’s policy agenda but will assess the data as it comes –remembering that President-elect Trump will not be sworn in until 20 January 2025.
Moreover, when asked if he would consider stepping down if pressured by Trump, Powell was resolute, saying he had “no intention of resigning,” sending a clear message on the Fed’s autonomy.
Reflecting on Trump’s intent to reshape the Fed by altering its dual mandate and influencing rate-setting, Halmarick noted that, despite Republican control of Congress, passing such changes "would be difficult."
“President Trump’s ability to ‘take-over’ the Fed and reduce its independence is, therefore, limited in the near-term. But as with everything under a Trump presidency, that is unlikely to stop him from making his own thoughts on the level and outlook for interest rates very well known –which, as stated, could add to financial market volatility and uncertainty,” Halmarick said.
Similarly, Seema Shah, chief global strategist at Principal Asset Management, observed, Trump’s potential policy shifts bring a fair amount of uncertainty, especially around trade and fiscal policy.
With improved economic data and hotter-than-expected inflation readings, she noted there is now less certainty around the Fed’s path for future cuts.
Markets, which were once certain in another rate cut next month, now see a roughly 60 per cent probability of that outcome.
“Beyond December, the rate path is very uncertain,” Shah said.
“As well as considerations around the neutral rate, the Fed may have to consider the inflation and growth impact of policy proposals. As it stands, however, investors and the Fed alike still lack clarity on the timing and magnitude of policy proposals, suggesting an extended period of uncertainty around the Fed’s future path for rates.”
