Wall St

The Fed preps another rate cut, amid cloudy post-election outlook

Author: Andrew Ackerman Source: The Washington Post

November 7, 2024 at 12:21

Federal Reserve Board Chair Jerome H. Powell speaks after a two-day meeting on interest rate policy in September. (Tom Brenner/Reuters)

A quarter-percentage-point cut is anticipated as inflation continues to cool, following a jumbo-size September reduction.

The Federal Reserve is poised to lower interest rates Thursday by a quarter-percentage point as inflation continues to cool, even as Donald Trump’s presidential victory this week may upend the U.S. economic outlook and the central bank’s future stance on rates.

Thursday’s anticipated second consecutive rate cut is the latest signal that Fed officials have turned a page on an era of dangerously high inflation and have shifted their attention to a slowing job market. That prompted them in September to reduce their benchmark interest rate for the first time in nearly four years, dropping rates by a larger-than-usual half-percentage point.

The economy is showing some signs of strength, with promising growth, consumer-spending and unemployment figures released in recent weeks. There are also warning signs: The economy picked up just 12,000 jobs in October, the slowest pace in nearly four years, as a labor market cooldown was exacerbated by major hurricanes and labor strikes.

Wall Street will be watching closely for signs of how much more the Fed plans to drop rates over the coming months. Fed officials signaled ahead of the election that they see rates continuing to decline gradually. Trump’s campaign commitment to impose tariffs on U.S. imports, to conduct deportations of undocumented immigrants and to renew expiring tax cuts could, depending on how they are implemented, put upward pressure on inflation. They could also expand federal deficits.

That might make the Fed reluctant to continue cutting rates at a rapid clip.

“Various policy uncertainties may lead the Fed to move more slowly than it otherwise would,” JPMorgan Chase & Co.’s Michael Feroli said in a research note on Wednesday.

Thursday’s announcement is set for 2 p.m. Eastern time, at the end of the Fed’s two-day policy meeting. Then, at 2:30 p.m., Fed Chair Jerome H. Powell will appear at what will be a closely watched news conference. He will probably be pressed for a diagnosis of how the presidential and congressional election results could affect the U.S. economic outlook as well as the Fed’s policy. The Fed closely guards its independence from politics, and Powell isn’t expected to wade into the matter too deeply.

While the Fed was practically guaranteed to cut rates at its last meeting, the size of the cut was up for debate. Ultimately, officials decided that the economy was flashing enough warning signs to warrant a jumbo-size cut, and publicly expressed confidence that such a large swing would help ensure that the job market didn’t weaken any more than it already had.

This week’s Fed meeting should lack the drama of last month’s, when the Fed itself was divided on how much to cut. Analysts and investors in the futures market believe that yet another quarter-percentage point cut is likely at the Fed’s final 2024 meeting, in December, though the pace of additional cuts next year are uncertain.

“The Fed will show a steady hand, cut [a quarter-percentage point] and leave another cut in December as the base case without ruling out a skip,” said Krishna Guha, vice chairman of Evercore ISI and a former top official at the New York Fed.

It’s no secret that Trump wants the White House to have more say in the operations of the Fed, particularly regarding its decisions on monetary policy. Last month, Trump said that as president, he ought to have a “right to say I think he should go up or down a little bit” on interest rates. He added, “I don’t think I should be allowed to order it,” he added.

During his first term, Trump publicly flirted with the idea of dismissing Powell as chairman and potentially elevating another Fed governor to the chairmanship. He ultimately did neither.

Some bank executives and former Fed officials say they expect Trump, in a new term, to try a potentially less controversial intrusion on Fed independence by demoting the Fed board member tasked with regulating Wall Street: Biden appointee and former Obama-era Treasury official Michael Barr, The Washington Post reported last month.