The Fed cuts rates again, but Trump's inflation worries loom

Topline

The Federal Reserve cut interest rates for the second straight day on Thursday, but President-elect Donald Trump's economic policies have some economists questioning the trajectory of interest rates next year.

Important facts

What influence will Trump have on the Fed?

Although the Fed's move this week didn't bring much drama, economists at major banks noted after this week's election that there will be additional fluctuations in the future, potentially threatening the pace and magnitude of further rate cuts. “The various policy uncertainties could cause the Fed to move more slowly than it otherwise would,” Michael Feroli, chief U.S. economist at JPMorgan Chase, wrote in a note to clients on Wednesday, forecasting a quarterly rate cut through to achieve 3.5%. Bank of America's senior U.S. economist warns that Trump's aggressive tariff proposals “could derail the Fed's cutting cycle” and that the Fed will refrain from further rate cuts when announcing higher import tariffs, citing inflationary effects of tariffs. And Deutsche Bank's chief U.S. economist, Matthew Luzzetti, suggests the Fed's outlook for 2025 is “hawkish,” pointing to the possibility of “more stubborn” inflation due to tariffs.

Big number

4% to 4.5%. There, Luzzetti predicts the Fed's interest rate will end next year almost a full percentage point higher than the median forecast of 3.4% shared by Fed staff in September.

Important background

It has been a turbulent four years for monetary policy. The Fed cut interest rates to near zero in March 2020 in response to the sudden economic shocks resulting from the COVID-19 lockdowns. It then raised interest rates to a two-decade high of over 5% in 2022 and 2023 in response to rising inflation and moved to cut rates in the second half of this year as inflation weakened. The Central Bank sets the target interest rate for federal funds, which only officially sets the cost of borrowing in overnight transactions between financial institutions, but strongly influences lending rates throughout the country. This means that lower interest rates tend to help stimulate the economy, as consumer and business borrowers are more likely to take on cheaper debt. But the Fed's rate cut in September did not have the desired effect as Treasury yields, which serve as an indicator of market expectations of Fed policy, actually rose sharply. This week's rise in yields appears to be related to inflation concerns stemming from Trump's proposed tariffs. Economists largely agree that these would increase consumer prices. But it also reflects increased belief in the strength of the US economy overall, as better economic conditions require the stimulation rate to fall less pressure.

Surprising fact

Mortgage rates rose this week to their highest level in three months, with the 30-year average mortgage rate hitting 6.79%, according to federally-backed lender Freddie Mac. That's about 70 basis points higher than mortgage rates in the week after the September rate cut, reflecting the rise in 10-year Treasury yields.

tangent

Despite the couple's checkered history, Trump intends to let Powell finish his term at the Fed's helm by 2026, CNN reported Thursday, citing an anonymous adviser to the president-elect. Trump said in August that he believes “the president should at least have a say on interest rates,” a claim that would break precedent for the independently run Fed.

Crucial quote

“The Fed will be even more important in 2025 than it is today, if you can even imagine it,” Siebert Chief Investment Officer Mark Malek said in emailed comments.

Further reading

ForbesHere's why Trump's victory catapulted dollar and bond yields to multi-month highsFrom Derek Saul