Recently, the volatility in U.S. inflation data, coupled with the potential policies that Trump might implement, has complicated market expectations for the Fed's interest rate cut path. At the November meeting, the Fed enacted its second rate cut of the year, lowering the benchmark rate by 25 basis points to 4.5%-4.75%. However, as the economic environment changes, the market is beginning to worry about the future policy direction.
Double Pressure from Inflation and Employment Data
Recently, U.S. inflation has fluctuated slightly, with the core PCE price index rising year-over-year to 2.7%, the highest point in nearly six months. The market generally believes that the tariffs and immigration restrictions Trump might introduce in the future will exacerbate inflationary pressures. This could disrupt the inflation control framework that the Fed has just established, further complicating the pace of rate cuts.
In terms of employment, although the U.S. unemployment rate has fallen to 4.1%, new job creation was not as strong as expected due to the impact of hurricanes and strikes. The Fed's meeting statement was more vague about the labor market, indicating uncertainty about future employment trends.
Potential Impact of Trump’s Economic Policies
Trump's future policies could radically alter the current economic environment. The market is concerned that his aggressive tariff policies could raise the inflation center in the short term, while his tax cuts and infrastructure investment plans could create demand-driven effects for the economy. Once these policies are implemented, the Fed may have to reassess its rate cut path or even delay the rate cut process.
Moreover, Trump has repeatedly criticized the Fed Chair’s policy stance during his campaign. Although the U.S. President cannot directly dismiss the Fed Chair, he can indirectly influence the Fed’s decision-making by nominating board members. In the next four years, the terms of four members of the Fed Board will expire, potentially leading to more interference in policy independence.
Uncertainty of the Rate Cut Path
Currently, market expectations for rate cuts have significantly shrunk. The forecast has changed from expecting more than a 100-basis point cut by 2025 to only 75 basis points. The ultimate rate cut this round may end higher than the pre-pandemic central level, with the benchmark rate expected to remain at 3.75%-4%. Additionally, as expectations for further cuts in December decline, the Fed might pause cuts to observe economic trends.
Fed’s Policy Independence Faces Challenges
Historically, maintaining policy independence has been the cornerstone of stability in financial markets for the Fed. However, the Fed's future independence might face challenges due to Trump's political pressure. Historical data shows that when markets anticipate rate cuts, Trump’s public pressure often reinforces market sentiment, indirectly influencing policy adjustments.
Moreover, Trump's policy framework might escalate the impact on Fed decisions through economic intervention. For instance, a widespread benchmark tariff could increase the year-over-year growth rate of the U.S. CPI to over 3% by 2025. This would undoubtedly dampen the Fed’s pace of rate cuts, increasing market uncertainty.
Future Outlook
With multiple factors converging, the Fed’s future policy path has become more complex and unpredictable. Whether due to changes in the economic environment or escalating political influences, the market needs to be wary of potential risks. Balancing the Fed's independence with managing inflation pressures will be a key challenge in the future.
