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US Elections Create Further Fed Uncertainty – Seema Shah
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US Elections Create Further Fed Uncertainty – Seema Shah

The Fed’s rate cut in November, while widely expected, sets a cautious tone as policymakers navigate a complex landscape under the incoming Trump administration. With uncertainties surrounding fiscal and trade policies, inflationary pressures and economic resilience, the Fed is likely to slow its pace of rate cuts, underscoring lingering uncertainty over the direction of Fed policy amid evolving fiscal dynamics.

At the November FOMC meeting, held just two days after the US presidential election, officials cut policy rates by 25 basis points to 4.50%-4.75%. Although the decision was fully anticipated by markets, the Fed’s path is increasingly shrouded in uncertainty.

Fed Chairman Powell stressed that the central bank will wait for President-elect Donald Trump’s policies to take shape before responding to them. Not only does Trump’s ability to advance his tariff agenda depend on the final makeup of Congress, which may not be known for days, perhaps longer, but the full extent of the proposed tariff increases is also unknown . Policy action often differs from policy proposals.

However, tax cuts and tariffs, among other policy proposals, have the potential to have a significant impact on inflation, inflationary expectations and economic growth. With policymakers already so wary of the risk of renewed price pressures, especially amid the continued strength of the US economy, the Fed will need to tread a cautious path.

It is increasingly likely that in early 2025, rather than cutting policy rates at every meeting, the Fed will likely slow the pace of tapering at every other meeting – with some risk that rates will not come down much more than the Fed or the market had originally expected. An extended period of uncertainty is expected for the US economy, none more so than the Fed’s policy path.

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