Federal Reserve Chairman Jerome Powell holds a news conference after a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, US, September 18, 2024. REUTERS/Tom Brenner
Tom Brenner | Reuters
The Fed will likely stick to the business at hand when it concludes its meeting on Thursday with another rate cut, but it will set its sights on the future against a backdrop that has suddenly become more complex.
Financial markets are pricing in almost certainty that the central bank's Federal Open Market Committee will cut its benchmark borrowing cost by a quarter of a percentage point as it seeks a policy “reset” for an economy experiencing moderate inflation and the labor market. softening.
However, the focus will shift to what awaits Federal Reserve Chairman Jerome Powell and his Fed colleagues as they deal with a changing economy — and the political earthquake that is Donald Trump's stunning victory in the presidential race.
“We believe Powell will refuse to make any premature judgment on the ramifications of the election on the economy and interest rates, and will seek to be a source of stability and calm,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI. This came in a memorandum issued before the election results were known.
Guha added that, in keeping with policymakers' historical desire to remain above the political fray, Powell “will say the Fed will take the time it needs to study the new administration's plans” and then “will refine that assessment as actual policies are developed and enacted.” .
So, while the immediate action would be to stay the course and enact the cut, which is equal to 25 basis points, the market's attention will likely turn to what the committee and Powell have to say about the future. The federal funds rate, which sets what banks charge each other for overnight lending but often affects consumer debt as well, is targeting a range of 4.75%-5.0%.
Market prices currently favor another quarter-point cut in December, followed by a pause in January and then multiple cuts through 2025.
Preparing for Trump
But if Trump's agenda — tax cuts, spending increases and tough tariffs — comes to fruition, it could have a tangible impact on the Fed as it tries to correct policy after massive interest rate hikes aimed at controlling inflation. Many economists believe that another round of isolationist economic moves by Trump could reignite inflation, which has remained below 3% during Trump's entire first term despite a similar prescription.
Trump was a frequent critic of Powell and the Fed during his first term, which ran from 2017 to 2021, and was a supporter of low interest rates.
“Everyone is looking forward to future rate cuts and whether anything will be sent,” said Quincy Crosby, chief global strategist at LPL Financial. “However, there is also the question of whether or not they can declare victory over inflation.”
Any answers to these questions will largely be left to the press conference that Powell will hold after the meeting.
Although the committee will issue its joint decision on interest rates, it will not provide an update to the Summary of Economic Outlook, a quarterly document that includes agreed updates on inflation, GDP growth and unemployment, as well as an anonymous “dot chart” of economic expectations. Interest rate forecasts for individual officials.
After the pause in January, there is a lot of uncertainty in the market about which direction the Fed is headed. The next SEP will be updated in December.
“What we'll be hearing more and more about is the final price,” Crosby said. “This will come back into the lexicon if yields continue to rise, and it is not entirely linked to growth.”
So where is the end?
Traders in the federal funds futures market are betting on an aggressive pace of cuts that by the end of 2025 will lift the benchmark interest rate to a target range of 3.75%-4.0%, or a full percentage point below the current level after the half-percentage mark in September. Cut point. The banks' collateralized overnight financing rate is a bit more cautious, suggesting a short-term interest rate of around 4.2% at the end of next year.
“The key question here is, what is the end point of the interest rate cutting cycle?” said Bill English, former head of monetary affairs at the Federal Reserve and now a professor of finance at Yale School of Management. “Fairly soon, they should be thinking about where we think this period of rate cuts is going to change with the economy looking very strong. They might want to pause fairly soon and see how things develop.”
Powell may also be asked to address the Fed's current moves to reduce bond holdings on its balance sheet.
Since the effort began in June 2022, the Fed has reduced nearly $2 trillion of its holdings in Treasuries and mortgage-backed securities. Fed officials said the balance sheet reduction could continue even while cutting interest rates, although Wall Street forecasts the runoff ends in early 2025.
“They were happy to leave that kind of filtering in the background and will probably continue to do so,” English said. “But there will be a lot of interest in the next few meetings. At what point will they further adjust the pace of the runoffs?”