US presidential election boots on the ground! Global investors turn their attention to Powell

According to economists' general expectations and CME's "Fed Watch Tool", the Federal Reserve is very likely to announce a continued rate cut process during the rate meeting on Thursday in Eastern Time, with economists expecting a 25 basis point rate cut, rather than the 50 basis point rate cut unexpectedly announced last time. However, with President Trump securing victory in the US presidential election, the economic and financial situation suddenly becomes much more complicated, and the Federal Reserve may focus on future monetary policy and may plan for "expectations management" in advance. Additionally, given the Federal Reserve policymakers' historical desire to stay out of political disputes, Powell may avoid directly commenting on expectations related to President-elect Donald Trump. Global financial markets are almost certain that the Federal Reserves Federal Open Market Committee (FOMC) will reduce the benchmark borrowing cost by 25 basis points on Thursday in Eastern Time (early Friday Beijing time), as Fed officials are trying to "adjust" the monetary policy path for the U.S. economy, showing signs of moderate inflation decline and a soft labor market. However, market focus will shift to Federal Reserve Chairman Jerome Powell and his colleagues' comments on how to address uncertainties in the constantly changing economic and financial situations, especially the political environment and fiscal expectations brought about by Donald Trump's astonishing victory in the presidential election. Global attention will shift from the "Trump vs. Harris Contest" to Federal Reserve Chairman Powell During the election campaign, Trump promised to be more aggressive in imposing tariffs on US trading partners, deporting millions of illegal immigrants, and continuing the 2017 corporate tax cut policy. Once these policies are implemented, they may push inflation, wages, and federal deficits higher. All of this will make the Fed's job much more complicated, as Fed officials are striving to lower the inflation rate to the 2% target while protecting the U.S. job market. In this difficult task, if Trump once again publicly criticizes Fed Chair Powell as in the past, the Fed may find itself in an embarrassing political spotlight, and may even be influenced by Trump on some key monetary policy decisions. According to some analysts, with Trump announcing victory, Powell and other Fed policymakers may handle expectations management of "when and how much to cut interest rates" more cautiously, as they need to evaluate how Trump's economic proposals will concrete fiscal policy. Economist Derek Tang from LH Meyer/Currency Policy Analysis Company stated, "They may see higher inflation risks in the coming years due to tariffs or reduced immigration. Their mentality may be 'by slightly slowing down the rate cut, we can have more time to observe inflation expectations and the actual situation in the labor market.'" "We believe Fed Chair Powell will refuse to make any early judgments on the impact of the presidential election on the economy and interest rates, and will seek to be a stable and calm source." Krishna Guha, Global Policy and Central Bank Strategy Director at Evercore ISI, stated in a report before the election results were announced. Krishna Guha added that to remain consistent with the vision that policymakers have always hoped to stay out of political disputes, Powell may take time to explain "the Fed will study the new government's plans going forward," and then "continue to refine this assessment in actual policy-making and issuance in the future." Therefore, despite the immediate need to adhere to the established policy of cutting interest rates by 25 basis points to boost US economic growth and avoid pushing the US labor market into a collapse, market attention may shift to the Federal Open Market Committee and Fed Chair Powell's views on the future policy path and the new US government under Trump's leadership. The federal funds rate set by the Fed almost directly sets the overnight interbank lending rate between large US commercial banks, but it also typically affects the pricing curve of consumer debt levels as well as many other rates such as US 30-year mortgage rates, deposit rates, etc. The current federal funds rate is between 4.75% and 5.0%. The current market pricing favors another rate cut of 25 basis points in December, followed by a pause in January, and then multiple rate cuts by 2025. The Federal Reserve may be preparing for Trump's return to the White House It is undeniable that if Trump's economic or fiscal agenda - such as tax cuts, increased government spending, and imposing high tariffs - are implemented, it will have a significant impact on the Fed's policy path, as the Fed is trying to "adjust policy" towards rate cuts to boost the US economy after a substantial hike in rates to control inflation. Many economists believe that Trump's new round of isolationist economic measures may reignite the inflation rate. However, although Trump took similar actions in his first term, the inflation rate throughout Trump's entire term has remained below 3%. It is understood that after Donald Trump announced his victory in the presidential election, the team of economists from Nomura now predicts that the Fed will only cut rates once in 2025 and raise the terminal rate forecast by 50 basis points to 3.625%. David Seif and other Nomura economists wrote in a report, "We expect Trump to fulfill his campaign proposal of raising tariffs, significantly pushing up inflation in the short term and causing moderate economic growth in the US to slow down." They previously forecasted that the Fed would cut rates four times by 2025. David Kelly, Chief Global Strategist at JPMorgan Asset Management, warned earlier this week that if Trump wins the US election, the Fed may halt its rate cut easing cycle as early as December. It is worth noting that while rising inflation rates will disrupt the Fed's rate-cutting path, Trump may force the Fed to cut rates to stimulate the economy. Throughout his first term from 2017 to 2021, Trump frequently criticized Powell and the Fed and supported low rates. "Everyone is focusing on the future rate-cutting path, and whether there will be any news revealed." Quincy Kr, Chief Global Strategist at LPL Financial expressed.Osby said, "However, there is still another question, which is whether they can declare victory in combating inflation rates."For any answers to these questions, much will be left to Powell's remarks at the news conference after the Fed interest rate decision. Although the Fed will announce its joint decision on interest rates, it will not provide the latest update on its economic forecast summary, which is a quarterly report that includes consensus updates on inflation rates, GDP growth, unemployment rates, and an anonymous interest rate "dot plot" showing Fed voting officials' rate expectations. This predictive report will be updated next in December. CME's "Fed Watch Tool" shows that there is considerable uncertainty in the interest rate futures market about the Fed's direction, especially with traders having differing opinions on the policy path for December and January. Some traders are betting that the Fed will pause rate cuts in December or January. Krosby said, "We will increasingly hear the term 'terminal rate'. If the yield on the 10-year Treasury continues to rise, this term will come back into the dictionary, and it is not entirely related to economic growth." So where is the endpoint? After Trump's victory announcement, traders in the interest rate futures market were betting on a relatively aggressive pace of rate cuts compared to the more conservative expectations of Nomura economists, betting that by the end of 2025, the federal funds rate will reach the target range of 3.75%-4.0%. This is 100 basis points lower than the current level after a 0.5 percentage point cut in September, but this latest expectation is lower than the 150-200 basis point cut expectation priced in by the market before Trump's victory announcement. Pricing in the overnight secured funding rate (SOFR) market is more cautious, implying a short-term rate of around 4.2% by the end of next year. "A key question here is, what is the endpoint of this rate cut cycle?" said Bill English, former head of monetary affairs at the Fed and current finance professor at the Yale School of Management. "Soon, they will consider how the rate cut cycle will change in what looks like a fairly strong economy. They may soon pause the rate cuts and see how things develop." Following Trump's "victory" announcement, a recent article by Nick Timiraos, a Wall Street Journal reporter known as the "new Fed correspondent," stated that Trump's election would not currently affect the Fed's stance on monetary policy, and if the Republicans "sweep" (meaning they win both houses) in the aftermath, the December meeting may modify some of the language regarding the "fundamental assumptions of rate cuts." Timiraos also stated that considering the Fed's announcement of a 25 basis point rate cut this week as a highly probable event, the market's focus has shifted to how many more rate cuts the Fed will need before achieving a successful "soft landing" for the U.S. economy. Timiraos expects Fed officials to continue giving ambiguous answers this week: it depends on the specific circumstances. Powell and other Fed policymakers may also be required to stop the measures to reduce the Fed's balance sheet currently, i.e., Trump may pressure the Fed to stop tapering after taking office. Since starting tapering in June 2022, the Fed has reduced its holdings of U.S. Treasury bonds and mortgage-backed securities by nearly $2 trillion. Fed officials generally state that even with rate cuts, balance sheet reduction will continue, although the expectation on Wall Street is that tapering will end in early 2025. "They are willing to let this penetration stay behind the scenes, and they may continue to do so," English said. "But the next few meetings will be of interest to many as to when they will make further adjustments to the pace of tapering."