Rate Cuts: A Review of the FOMC Meeting and the Complex Landscape Behind Them | Moomoo Research

On November 7, Eastern Time, the Federal Reserve held its November FOMC meeting as scheduled and announced a reduction in the target range for the federal funds rate to 4.5%-4.75%. This decision was not unexpected, as the market widely anticipated a 25 basis point rate cut at this meeting. The Fed's next meeting is planned for December 18, 2024, and investors are closely watching the future direction of monetary policy.

The Fed's rate cut is not only a response to the pressures of economic slowdown but also a move to address the uncertainties surrounding declining inflation. In his statement, Powell firmly defended the Fed's independence, demonstrating resistance to external political pressures. In contrast, the response from Trump’s team has been relatively measured, possibly signaling that they will not intervene in the Fed’s rate-cutting pace for now.

Currently, inflation is the primary concern for American voters, and a rapid rate cut could lead to a rebound in inflation, impacting Trump's approval ratings. Therefore, looking ahead, the Fed is likely to continue its rate-cutting cycle within the framework of dual mandates on employment and inflation. Additionally, policies promoted by the Trump administration, such as tightening immigration, fiscal expansion, raising tariffs, and tax cuts, may influence market inflation expectations, leading to increased volatility in U.S. Treasury yields.

As of the market close on November 7, the Dow Jones Industrial Average was essentially flat, the S&P 500 rose by 0.74%, and the Nasdaq Composite increased by 1.51%. Meanwhile, the yields on 10-year and 2-year U.S. Treasuries fell by 11 basis points and 6 basis points, respectively, while the dollar index closed at 104.3. These reactions indicate the complexity of market expectations for rate cuts and economic prospects.

Prior to the FOMC meeting, the CME FedWatch tool showed that market expectations for a rate cut were above 90%. Notably, Trump’s policies, such as immigration restrictions and tariff increases, could elevate medium- to long-term inflation levels. We expect these policies to raise the inflation baseline by 1.1 to 2.9 percentage points.

The Republican control of both houses of Congress and Trump’s influence within the party have placed unprecedented political pressure on the Federal Reserve. Trump criticized the Fed’s rate adjustments in August, claiming that there should be more discourse regarding interest rates. In the November meeting, Powell stated that he would continue to monitor economic data and maintain a cautious approach. He emphasized that he would not yield to Trump’s demands, even when facing political pressure.

Looking ahead, how will Trump’s "Era 2.0" impact rate cuts? From an economic and inflation perspective, Trump’s policies may lead to a rebound in inflation while also potentially enhancing economic resilience. However, this does not imply that the Fed will significantly reduce rates.

With the supply-demand gap not fully closed, rate cuts could stimulate a rebound in demand, while Trump’s tariffs and tightened immigration policies could further widen the supply-demand gap, increasing the "re-inflation risk." We anticipate that under different policy scenarios, the U.S. inflation baseline could rise by 2% to 4% by 2025.

Although current inflation levels are already below those of 2022 and 2023, in the context of Trump’s policies, the "last mile" to achieving lower inflation may become more extended. Fiscal expansion and tax cuts will indeed support the economy, but tightening immigration policies could weigh on economic growth, leading to an overall trend towards a "soft landing" for the U.S. economy.

During his new term, Trump will have three opportunities to appoint Federal Reserve officials, giving him some influence in exerting political pressure. However, rate cuts could not only impact inflation by driving up housing and stock prices but may also bring greater inflationary pressures in future immigration and tax policies.

In summary, the Federal Reserve will continue to operate within the dual mandates of employment and inflation throughout the upcoming rate-cutting cycle, while Trump’s policies will continuously influence market inflation expectations, and we expect increased fluctuations in U.S. Treasury yields.