WASHINGTON — On Thursday, officials from the Federal Reserve are expected to decrease their primary interest rate for the second consecutive time, as a reaction to the consistent decline in inflation pressures that have troubled many Americans and played a role in Donald Trump’s victory in the presidential election.
The uncertainty surrounding the Fed’s future decisions has increased since the election, especially considering that Trump’s economic strategies have been identified as possibly inflationary. His election has also raised concerns regarding potential interference from the White House in the Fed’s policy-making, as Trump has asserted that he should have a say in the central bank’s interest rate decisions.
Traditionally, the Federal Reserve has maintained its autonomy as an institution capable of making hard decisions about interest rates without succumbing to political pressure. During his previous presidency, Trump openly criticized Chair Jerome Powell after the Fed raised rates to counter inflation, and such behavior could re-emerge.
The economic landscape is becoming complicated, presenting mixed signals; while growth appears robust, hiring trends show signs of weakening. Nevertheless, consumer spending remains strong, raising concerns that the Fed may not need to lower borrowing costs. Furthermore, some fear that doing so could overstimulate the economy and reignite inflation.
Financial markets have also complicated the Fed’s outlook: Investors have markedly increased Treasury yields since the Fed’s decision to cut rates in September. Consequently, this has elevated borrowing costs across the economy, negating the advantages of the Fed’s half-point rate cut that accompanied its September meeting.
For instance, the average 30-year mortgage rate in the U.S. experienced a decline over the summer as the Fed indicated an intention to cut rates, only to see an increase again following the actual rate cut announcement.
Wider interest rates have ascended, driven by investor expectations for heightened inflation, larger federal budget deficits, and faster growth under a Trump presidency. Recently labeled the “Trump trade” by Wall Street, stock prices surged, as did the values of bitcoin and the dollar. Trump had previously spoken favorably about cryptocurrencies, and the dollar is likely poised to gain from higher rates, along with the proposed widespread increase in tariffs.
Trump’s suggestions to implement a minimum 10% tariff on all imports and significantly increase taxes on Chinese goods, alongside plans for mass deportation of undocumented immigrants, could almost undoubtedly lead to an uptick in inflation. This scenario would lessen the likelihood of the Fed proceeding with further cuts to its key rate. According to data from the central bank, annual inflation dropped to 2.1% in September.
Economists at Goldman Sachs predict that Trump’s proposed 10% tariff, along with heightened taxes on Chinese imports and vehicles from Mexico, could elevate inflation to approximately 2.75% to 3% by mid-2026.
An inflation hike of this nature would likely disrupt the Fed’s future rate cut plans, which were signaled back in September. In their last meeting, after implementing a considerable half-point reduction bringing the key rate to around 4.9%, officials projected two quarter-point rate reductions for later in the year — one on Thursday and another in December — along with four more reductions anticipated in 2025.
However, investors have shifted their expectations, now viewing rate cuts in the upcoming year as increasingly improbable. The anticipated probability of a rate cut during the Fed’s meeting in January plummeted to 28% on Wednesday, a notable drop from 41% just a day prior and from nearly 70% a month earlier, based on futures prices tracked by CME FedWatch.
The rise in borrowing expenses for items such as mortgages and auto loans, even as the Fed continues to cut its benchmark rate, poses a challenge for the central bank. Its objective to stimulate the economy through reduced borrowing costs might not yield the expected results if investors continue to push long-term rates higher.
The economy has reported robust growth at just below a 3% annual rate over the last six months, and consumer spending, particularly among higher-income households, showed strong increases in the third quarter. Meanwhile, companies have scaled back hiring, with many unemployed individuals facing difficulties in securing jobs. Powell has indicated that one of the reasons for the Fed’s rate reduction is to support the job market. Nonetheless, should economic growth maintain its current strong pace and inflation begins to rise, the Federal Reserve may find itself under increased pressure to halt or even reverse its interest rate cuts.