US Fed interest policy expected today, Trump victory unlikely to change rate cut plans

The US Federal Reserve is widely expected to cut interest rates by a quarter point Thursday (November 7), looking beyond the election results to continue easing borrowing costs on the back of cooling inflation.

The US central bank sits just a short walk from the White House, where Democratic President Joe Biden will soon hand back the keys to Donald Trump following the Republican’s election win.

Despite the political whiplash, analysts expect Fed policymakers meeting in Washington this week to eschew any drama.

“We still expect them to cut, at least in November,” KPMG Chief Economist Diane Swonk told AFP Wednesday.

After hiking interest rates to a two-decade high last year in a bid to control runaway inflation, the Fed recently began lowering its key lending rate again, cutting by half a percentage-point in September and signaling more to come.

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Since then, the Fed’s favored inflation gauge has eased to 2.1 per cent, while economic growth has remained robust.

The labor market has also stayed strong overall – despite a sharp hiring slowdown last month attributed in large part to adverse weather conditions and a labor strike.

“Generally speaking, the US economy looks quite resilient, and the labor market still looks very good,” Jim Bullard, the long-serving former St Louis Fed President, told AFP ahead of election day.

“I think basically this is as good as it gets in this business,” he said of the current economic picture, adding that he believed the Fed has now achieved a so-called “soft landing,” bringing down inflation without spurring a damaging recession.

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Bullard, who retired from the Fed last year to become dean of the Daniels School of Business at Purdue University, also expects the Fed to lower its key lending rate by 25 basis points this week to between 4.50 and 4.75 per cent.

He then expects policymakers to cut by the same amount at the final rate meeting of the year, in December.

“That is my baseline for now,” he said.

‘Keep the door open’

Futures traders also overwhelmingly expect the Fed to cut by a quarter percentage-point this week, assigning such a scenario a probability of around 99 per cent on Wednesday, according to data from CME Group.

Analysts are less certain about December’s rate decision. CME Group data implies a roughly 70 per cent chance of a further 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,” economists at Citi wrote in a client note ahead of Election Day.

KPMG’s Swonk said 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.”

‘Tug of war’

The US financial markets oscillated in the run-up to the election, as traders placed bets on what it could mean for the world’s largest economy.

Both Harris and Trump proposed policies on the campaign trail that independent analysts say would increase the size of the deficit, pushing up the overall US debt pile and potentially raising the cost of government borrowing as a result.

But even with a Trump victory now assured, a lot still depends on whether Republicans can pull of a “Red Sweep” of 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,” said Bullard.

“What’s distressing to an economist like me is that, really, fiscal discipline has broken down for both political parties,” he said.

“The tug of war is over, and you’ve just got both sides saying that they they’re willing to borrow more.”