The US Federal Reserve is expected to cut interest rates again this week as votes are counted in one of the tightest presidential races in decades.

Opinion polls show Democratic Vice President Kamala Harris and former Republican President Donald Trump in a dead heat before Election Day on Tuesday.

The Fed’s two-day interest rate meeting begins on Wednesday and is expected to result in a quarter-percentage point rate cut the following day.

The United States remained a bright spot globally economy this year, with inflation edging toward the Fed’s two percent target, while growth has remained robust and the labor market has remained surprisingly resilient despite recent signs of cooling.

Against this background, futures traders are confident that the US central bank will announce another interest rate cut, assigning a more than 99% probability that it will move by a quarter of a percentage point on Friday, according to CME Group data.

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Many analysts agree with market expectations for a 25 basis point cut, which would lower the Fed’s key lending rate to a target range of 4.50 to 4.75 percent — by three-quarters of a point percent below its level since early September.

“I think the Fed will probably cut interest rates by 25 basis points,” Jill Cetina, executive professor of finance at Texas A&M University and former supervisory vice president at the Dallas Fed, told AFP.

“We continue to expect the FOMC to cut the federal funds rate by 25bps at its November and December meetings,” Goldman Sachs economists wrote in a note to clients on Friday, referring to the Federal Open Market Committee (FOMC ) to establish the rate.

Independence Fed

The U.S. central bank has a dual mandate from Congress to act independently to keep inflation at two percent over the long term and to keep the unemployment rate at a sustainable low.

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Under this division of labor, the Fed addresses monetary policy — primarily by raising and lowering the benchmark interest rate to stimulate or reduce demand in the economy — while Congress and the White House address fiscal issues by adjusting tax policies and expenses.

On the campaign trail, Trump repeated his earlier criticism of Fed Chairman Jerome Powell, whom he first appointed to lead the US central bank, and indicated he would like to have “at least” a say in said about interest rates.

Instead, Harris said he would “never interfere” with the Fed’s decisions.

However, given that any changes to the Fed’s independence require congressional approval, a Trump victory is unlikely to lead to a significant change in the way the US central bank currently operates.

Rising borrowing costs

US government borrowing has exploded during the Covid-19 pandemic, and the deficit has remained high throughout Joe Biden’s four years in office, reaching the third-highest level on record in fiscal year 2024, according to Treasury Department figures.

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Both Harris and Trump are relying on policies that independent analysts expect will increase the deficit, which could force the Fed to keep rates higher than they would otherwise be over the long term to offset higher borrowing.

Since the Fed’s decision in September to cut rates by 50 basis points, there has been a sharp rise in yields on the popular two- and 10-year US Treasuries, which are heavily influenced by interest rate expectations.

That recent increase has pushed up borrowing costs for consumers and businesses, with the average rate on the popular 30-year fixed mortgage approaching seven percent in recent weeks, according to data from Freddie Mac.

Source: AFP