This week’s US Federal Reserve (Fed) monetary policy meeting, which takes place on Thursday, will not be a typical meeting. Fed members will have to make a decision on interest rates just one day after the official election date in the United States, and already knowing that Donald Trump will be president for the next 4 years. However, whatever the political events, the central bank’s approach is clear, and it has taken it upon itself to reiterate that it is now “data dependent”, and by this it refers to the macro aspect; According to this, political noise, or any speculation about the measures that the future US government could take, will not weigh on the Fed’s decision this week, and it will have to limit itself to acting on the basis of recent macroeconomic data which have been published. published in the United States.
With the latest employment and inflation figures, everything indicates that the Fed will moderate the pace of rate cuts to 25 basis points, after reducing them by 50 basis points in September, during the first cut central bank rates. in 4 years. At this last meeting there was already reluctance to proceed with such an aggressive rate cut, which was evident in the release of the meeting minutes and doubts will have increased after verifying that the US economy remains strong, which was evident with the publication of GDP deflator data for the month of October, but also employment.
A passing meeting, waiting for new data
For the Fed, it is now important not to make a sudden shift in its monetary policy, which would probably lead to a reduction in usual rates, thus avoiding carrying out a “jumbo” reduction like that of September. This week’s meeting is not conducive to surprising the markets, given that it is a meeting in the middle of an election week in the country, and also that on this occasion the Fed is not updating its macroeconomic forecast table, for which does not have all the information available on the table to be able to make an informed decision. Taking all this into account, The situation calls for aseptic movement, with no major surprises, until economic data indicates otherwise.. And so as not to alarm the markets, The Fed will likely decide to cut rates by 25 basis pointsand thus meet the current expectations of investors.
Once this week’s meeting is over, members of the Fed’s Federal Open Market Committee will have their eyes on December: they will update their macroeconomic forecast table and their dot chart, and will already make a decision with certainty to know with a little more foundation the policies that the new president is trying to promote and where they will be directed, which is essential to be able to establish the most appropriate monetary policy for the country.
Once the victory was confirmed, the market began selling bonds, anticipating more inflationary policies, and Now, only 3 rate cuts of 25 basis points are planned over the next 11 months, following the cut expected for this week.
The day before the election, the market was pricing in a 25 basis point rate cut this week, and there was a 50% chance there would be another of the same size at the December meeting. If this cut materializes, there would be 3 cuts of more than 25 basis points between January and September, a scenario that would involve a rate cut once every two meetings. Expectations for a rate cut have been reduced over the past month as the possibility of a Donald Trump election victory has gained momentum and U.S. bond yields have risen to the current level of 4.5%.
Powell’s message this week is of particular importance because His speech will make it possible to anticipate the direction that the central bank will take, already knowing who will occupy the White House for the next four years. Of course, in the past, Jerome Powell has shown himself to be an independent leader, and it is likely that he will maintain this attitude also in the last years of his term, which will end in 2026.
“The November FOMC meeting should not be an event. The elections will have much greater consequences on the markets in general, and even on the trajectory of Federal Reserve policy,” they explain from Bank of America. It is true that Trump’s electoral promises will generate more inflation than those presented by Harris, but the Fed will have to see the facts, and above all the real impact on the economy, and not the programs, before making its decisions in rate matter.
Other analysts also confirm this scenario, of temporary tranquility, as the most likely this week. “The most recent macroeconomic data suggests that the economy is performing better than expected, accompanied by a slightly higher than expected inflation rate. In line with this development, the market has gradually adjusted its expectations towards a less aggressive Fed, with a final interest rate. we expect it to be a little higher,” says Erik Weisman, chief economist at MFS Investment Management.
“The data we have seen throughout the month regarding growth and employment gives additional arguments to the Fed to “soften” the pace of reductions”explains Cristina Gavín, head of fixed income securities at the management company Ibercaja Gestión. “In this context, and taking into account all these factors, we are betting on a 25 basis point cut from the Federal Reserve which would leave the intervention rate in the 4.50%-4.75% range. We will have to wait December to see a possible further cut of 50 basis points, but as long as the situation allows it and inflationary pressures continue to ease The Fed, like the ECB, chooses to take its decisions meeting by meeting, on a basis. data, without committing to doing so a priori in any movement”, confirms Gavín.
“US economic data has surprised to the upside since the September meeting, while the increasing likelihood of a Trump victory in the US presidential election has contributed to the recent bond sell-off,” notes Michael Krautzberger, Global CIO fixed income securities at Allianz. Global investors. This possibility has finally come to fruition.
Trump threatens to cut rates
In recent weeks, many analysts have warned of the possibility that the Fed will fail to cut rates as much as expected if Donald Trump ultimately wins the presidential election, and especially if his victory is accompanied by a Republican victory in the House of Representatives. Representatives. Nannette Hechler-Fayd’Herbe, CIO of Lombard Odier, explains it to the economist.East in an interview in early October.
“A victory by former President Trump will likely be seen as the start of an inflationary crisis.while a victory for Vice President Harris is seen as more in line with the status quo. Although the Fed is unlikely to react immediately to election results – unless there is a contested election – the market could interpret those results differently,” says Weisman.
Ronald Temple, chief market strategist at Lazard, confirms this future scenario, and rules out that the Fed will be able to take note or adapt to the results of this week’s elections: “I don’t think the Fed will be able to adjust his rate plans “I would rather expect the Fed to change its rate path only if tariffs were imposed and if inflation rates seemed likely to rise,” he says.
