President-elect Donald Trump’s election victory is expected to significantly impact the Federal Reserve’s decision on interest rate cuts, with his proposed policies likely to stimulate the economy and potentially reverse the slowdown in inflation. Despite this, the Fed is still expected to cut the benchmark interest rate by a quarter of a percentage point to the 4.50%-4.75% range at their upcoming policy meeting. Futures contracts tied to the Fed’s policy rate suggest that another rate cut may occur in December, although with less certainty due to inflation nearing the 2% target and a cooling labor market.
Market rate expectations for future rate cuts have been continuously adjusted since the September meeting, with a shift towards a more gradual rate-cutting path. Traders are now betting that the Fed will only cut its policy rate twice in 2025, bringing it to the 3.75%-4% range by July. This would mark the end of the Fed’s rate-cutting campaign more quickly than initially anticipated, with the policy rate projected to be one percentage point higher than initially predicted by Fed policymakers after the September rate cut.
President-elect Trump campaigned on promises to improve the economy through higher tariffs, tax reductions, and an immigration crackdown. These policies are expected to lead to faster economic growth, a tighter labor market, and upward pressure on prices. As a result, some Wall Street economists are now forecasting fewer Fed rate cuts for the next year. However, the full impact of Trump’s policies may not be fully realized for years, and there are uncertainties surrounding how closely he will stick to his promises moving forward.
Economists believe that the delay in the inflationary effects of Trump’s policies will allow the Fed to continue cutting interest rates into 2026. This is due to the need for the central bank to recalibrate monetary policy to be less restrictive, given the potential impact of Trump’s proposed changes on the economy. Oxford Economics’ analysts maintain their view that the Fed will bring its policy rate down close to 3% by mid-2026, but acknowledge that this outlook could change as Trump’s intentions become clearer in the coming months.
Overall, the impending return of Donald Trump to the White House is expected to slow down the pace of interest rate cuts by the Federal Reserve, as his proposed policies could stimulate economic growth and potentially reverse the decline in inflation. Market expectations for future rate cuts have been adjusted in response to stronger economic data since September, and there is uncertainty regarding the exact impact of Trump’s policies on the economy. As Trump’s intentions become clearer, the Federal Reserve may adjust its monetary policy accordingly, maintaining a balance between stimulating economic growth and controlling inflation.
