The US Federal Reserve is poised to cut interest rates by a quarter point on Thursday, November 7th, marking a continuation of its efforts to ease borrowing costs in the face of declining inflation. This move comes despite the recent political shift, with analysts predicting a calm and data-driven approach from the Fed, rather than being influenced by election results.
The US central bank, situated just a short distance from the White House, will make its decision amid a change in political leadership. President Joe Biden will soon hand over the reins to Donald Trump, who secured a decisive victory in the recent election. Despite the political turbulence, economists anticipate a measured response from the Fed, focusing on economic fundamentals rather than the political landscape.
“We still expect them to cut, at least in November,” said Diane Swonk, KPMG’s Chief Economist, on Wednesday. After raising interest rates to a two-decade high last year to combat runaway inflation, the Fed recently began easing its stance, reducing the key lending rate by half a percentage point in September and signaling further cuts to come. Since then, the Fed’s preferred inflation gauge has eased to 2.1 percent, while economic growth has remained robust.
The labor market, though showing a sharp slowdown in hiring last month attributed largely to weather conditions and a labor strike, has remained strong overall. “Generally speaking, the US economy looks quite resilient, and the labor market still looks very good,” stated Jim Bullard, the former St. Louis Fed President, before the election. Bullard, now Dean of the Daniels School of Business at Purdue University, believes the Fed has achieved a “soft landing,” successfully curbing inflation without triggering a recession.
Bullard expects the Fed to lower its key lending rate by 25 basis points this week, bringing the rate to between 4.50 and 4.75 percent. He further anticipates a similar cut at the Fed’s final rate meeting of the year in December. “That is my baseline for now,” he said.
Futures traders overwhelmingly anticipate the Fed to cut by a quarter percentage point this week, assigning a 99 percent probability to this scenario, according to data from CME Group. However, December’s rate decision is shrouded in more uncertainty. CME Group data suggests a 70 percent chance of another quarter-point cut.
“The December rate cut decision will depend on labor market data and we expect a further softening to lead to a 50bp (basis point) rate cut,” wrote economists at Citi in a client note before Election Day.
KPMG’s Swonk indicated that policymakers “are expected to keep the door open a crack to a (December) cut, but with a high level of uncertainty in terms of how the economy is performing and inflation.”
The US financial markets fluctuated in the lead-up to the election as traders speculated about the potential impact on the world’s largest economy. Both Harris and Trump presented campaign proposals that independent analysts believe would increase the deficit, leading to a larger US debt pile and potentially raising the cost of government borrowing.
Even with Trump’s victory, the future trajectory depends on whether Republicans achieve a “Red Sweep,” controlling not only the White House and Senate but also the House of Representatives. “Markets tend to like divided government as a way to control spending and keep deficits down,” observed Bullard. “What’s distressing to an economist like me is that, really, fiscal discipline has broken down for both political parties,” he added. “The tug of war is over, and you’ve just got both sides saying that they they’re willing to borrow more.”
