Despite Trump’s Win, Federal Expected To Cut Rates By 25 Basis Points

The American central bank is expected to maintain its monetary easing cycle. The Federal Reserve is expected to cut its benchmark policy rate by 25 basis points (bps) at the end of its policy meeting on Thursday, a decision that may seem a footnote given the uncertain economic terrain the US central bank may soon be navigating under a second Trump administration. Former President Donald Trump’s victory in Tuesday’s presidential election and the prospect that his fellow Republicans will control both houses of Congress in January puts in play policy changes from import tariffs to tax cuts to stifled immigration that could rewrite the outlook for economic growth and inflation that Fed policymakers had expected to face next year.

It may take months for the proposals to evolve and work through Congress even under full Republican control. For now, new economic data continue to work in the Fed’s favor, with initial unemployment claims remained low in the latest week and worker productivity jumped by a healthy 2.2% in the third quarter, helping offset a 4.2% rise in workers’ hourly compensation. Fed officials have cited improved productivity as one of the factors that has improved their confidence in a continued decline in inflation.

However, with bond yields continuing their recent rise in the wake of Tuesday’s election results, investors now expect the Fed will end up cutting interest rates less than previously anticipated as it takes stock of a new economic regime that may mean bigger federal deficits, stronger growth, and higher inflation in the short run, and also come with longer-term risks. The Federal Reserve is widely expected to lower the policy rate after Donald Trump won the US presidential election.

Fed Chairman Powell’s remarks could provide important clues about the rate outlook. The market positioning suggests that the US Dollar (USD) faces a two-way risk heading into the event. Donald Trump’s victory in the presidential election triggered a rally in the US Treasury bond yields and boosted the USD on Wednesday. Additionally, Republicans gained the majority in the Senate and looked on track to control the House, paving the way for faster implementation of policies.

The Federal Open Market Committee (FOMC) releases its statement regarding monetary policy, which may influence the volatility of the US Dollar (USD) and determine a short-term positive or negative trend. A hawkish view is considered bullish for USD, while a dovish view is considered negative or bearish.

The US Federal Reserve is scheduled to announce its interest rate decision and publish the monetary policy statement on Thursday at 19:00 GMT, followed by Fed Chairman Jerome Powell’s press conference starting at 19:30 GMT. If Powell leaves the door open for one more 25 bps rate cut in December, the immediate reaction could hurt the USD. However, it’s too early for policymakers to assess the potential changes to the monetary policy due to proposed policies during the campaigning period. In December, the Fed will publish the revised Summary of Projections, which is likely to provide more useful information on what officials expect from the economy under the Trump administration.

In September, the US Federal Reserve (Fed) slashed the benchmark interest rate by 50 basis points or (½) half a percentage point to 4.75 %-5.5% for the first time in four years after policymakers expressed confidence that inflation was consistently on track to come near the 4% target. The Fed’s rate hikes have helped lower annual inflation from 9.1% in June 2022 to 2.5 %, but high rates have made borrowing costlier for businesses and households. According to economists, policymakers must keep rates high enough to defeat rising inflation without derailing the economy.

A seismic selloff in Treasuries stalled Thursday as investors turned their attention from Donald Trump’s victory in the US presidential election to interest-rate decisions by major central banks including the Federal Reserve. The yield on 30-year US bonds fell about four basis points to 4.57 % after a 17-basis-point surge Wednesday, the biggest since March 2020. UK debt rebounded from three days of losses as the Bank of England delivered an expected rate cut, while euro-area notes fell as investors digested news of snap elections in Germany.

Traders are looking to central bankers for clues on how Trump’s tax-cut and tariff policies could alter their outlook for global growth and inflation. Fed Chair Jerome Powell holds a press conference after Thursday’s decision, expected to be a quarter-point rate cut. Gold prices rebounded from a three-week low on Thursday on the back of a weaker dollar and as investors awaited the US Fed decision. Spot gold was up 1.3% to $2,692.59 per ounce, while US gold futures rose 0.9% to $2,700.10.

The dollar fell on Wednesday before the Federal Reserve is expected to cut rates by 25 basis points, while traders were also seen as closing out profitable bets on a Donald Trump presidency after his election victory on Tuesday. Republicans also won the Senate majority, putting the party on track for a clean sweep that would allow it to make larger legislative changes. They are leading the race to win the House of Representatives, though this has yet to be decided.

Wall Street’s main indexes held on to their gains on Thursday in the run-up to the US Federal Reserve’s interest-rate decision, extending a sharp rally sparked by Donald Trump’s stunning comeback as US president for a second time.