Federal Reserve officials are preparing for the second Fed rate cut next week, in response to a steady decline in the inflationary pressures that previously contributed to widespread frustration among Americans and factored into Donald Trump’s presidential win.

However, the Fed’s future policy decisions are now uncertain after the election, as Trump’s economic plans have been criticized for fueling inflation. The appointment also raises questions about political influence on the Federal Reserve’s independent decision-making, with Trump arguing as president that he should have a more significant say over interest rates.

Trump’s Push for Fed Rate Cut May Face Limits

The Federal Reserve has traditionally guarded its independence in setting borrowing rates free from political influence whether there is a Fed rate cut or there is a rise. However, next week, it seems there would be further rate cut by expected 0.25%.

On the campaign trail, Donald Trump promised financial relief to consumers through lower interest rates. However, now, as president, this will be hard work that will come about very slowly- for the most part, out of his hands.

Trump promised he would serve to lower the rates, but he didn’t say how. He blamed the Fed for keeping rates too high and said president should have more significant sway over setting rates. He publicly scolded Chairman Jerome Powell for moving too when it comes to Fed rate cut.

Trump has indeed pressed the Federal Reserve for rate cuts to help consumers and businesses. Still, his options are more limited regarding mortgage and other long-term loan rates, set by the bond market. Those reflect a mix of expectations about inflation, the likelihood of economic growth, and the outlook for long-term debt in the United States, each factor beyond the control of any one person or organization.

Still, consumer spending remains strong. Some economists, therefore, think that lowering interest rates further could cause overheating of the economy and re-ignite inflation.

Investors Raise Yields, Dimming Impact of Fed Rate Cut Amid Trump’s Economic Outlook

Financial markets are now confronting the Federal Reserve with a newer challenge. Investors have driven up Treasury yields sharply since the last rate cut, pushing up borrowing costs across the economy. They are also undermining the benefits of the Fed’s half-point reduction in its benchmark rate.

The average U.S. 30-year mortgage rate fell this summer after the Fed’s anticipated rate cut. However, rates rose again once the central bank followed through with its plan. The bigger picture shows interest rates rising since the election as investors prepare for potential inflation and higher federal deficits.

Expectations of faster economic growth under President-elect Trump have also contributed to rate increases. This “Trump trade” has boosted stock prices, the dollar, and Bitcoin’s value.

Trump’s policies, including higher tariffs and import taxes, could further fuel inflation. His immigration stance may also contribute to inflation pressures, limiting the Fed’s options for rate cuts. Annual inflation fell to 2.1% in September, though broader trends could impact future changes.

Possible Bitcoin Rally as Investors Seek Safe Haven 

Bitcoin has long been sold as a hedge against inflation, the devaluation of currency, and low interest rates. That theory held up when prices surged, seemingly immune to traditional market pressures. In reality, Bitcoin’s trajectory has proved sensitive to the very same forces that impact other high-risk assets, such as retail stocks.

As interest rates rise, riskier assets like Bitcoin become less appealing to investors. Conversely, rate cuts tend to buoy the Bitcoin community. Bitcoin’s decline in price since late 2021 has mirrored the timing of the Federal Reserve’s tightening of monetary policy, and then the collapse of FTX really whalloped market sentiment. But when the rate hikes slowed and banking instability sent shockwaves through markets, interest in Bitcoin sparked anew in 2023. When Treasury yields peaked in October, the hopes rose for a way to lesser rates, setting the stage for a rally in Bitcoin.

During September and November 2024, this was evidence that the Fed rate cut may continue-the restored optimism within the crypto community helped Bitcoin rally. If the Fed decides on further cuts, Bitcoin may see a full-on rally as investors start seeking shelter in economic volatility.

 

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Filed under: News - @ November 9, 2024 7:18 pm