As markets and economists had expected, the US Federal Reserve cut interest rates again last week.
However, the post-announcement press conference was a little different to usual, coming hot on the heels of the election.
Fed Chair Jerome Powell fielded the usual array of economic questions, as well as several about President-elect Donald Trump.
He clearly didn’t want to talk politics so offered nothing in response, and got away with it because the outcome was so fresh.
The Fed can’t avoid talking about Trump forever though.
It meets again in December then in late January, and markets see a good chance of a pause in the easing cycle at one of those meetings.
Powell will be subjected to the same line of political questioning, and he’s unlikely to get off so easily.
The two clashed regularly during Trump’s first term, even though Trump appointed Powell to the position back in 2017.
That saw Powell replace Janet Yellen at the helm of the world’s biggest central bank, before President Joe Biden reappointed him for another four years.
Powell’s current term expires in 2026, and despite Trump threatening to fire him on several occasions that’s unlikely to happen.
This means the tension is likely to resume, when the central bank is trying to navigate an already difficult path.
The US inflation rate has been in the 2-3 per cent range for four months.
That’s great progress, after it hit 9.1 per cent (the highest since Ronald Reagan was in office in the 1980s) in 2022.
However, the Trump agenda of reducing taxes and implementing tariffs is inflationary.
That’s one reason longer-term interest rates and inflation expectations have increased recently, while forecasts for Fed cuts have been pared back.
Right now, markets see another 50 basis points of easing through to the middle of 2025.
A month ago, it was more like 100, so markets are betting the Fed will have to go slower from here.
The US 10-year Treasury yield rose above 4.4 per cent last week.
That’s the highest in four months and more than 70 basis points above where it was the day after the Fed’s 50-basis point cut in September.
The 10-year Treasury yield is an important benchmark for financial markets, and it influences mortgage rates so it matters to prospective homeowners too.
The Committee for a Responsible Federal Budget (CRFB) has a base case estimate for an increase of US$7.75 trillion in the deficit over the next decade under the Trump plan.
That would see debt to GDP rise above 140 per cent by 2035, compared with about 90 per cent today.
Having said that, we don’t know how much of Trumps stated agenda will ultimately be implemented.
He also promised to lower inflation on the campaign trail, and that goal is inconsistent with some of his other policies.
Then again, inflation averaged about two per cent during Trump’s first term and never hit three, despite a raft of tariffs being introduced.
The Democrats can’t throw stones either, as President Joe Biden left most of these in place and even added a few more.
We’ll have to wait for the inauguration of Donald Trump as the 47th president in January, and then see how he approaches the first few months of 2025.
Until then, a lot of this is up in the air.
What we do know is that the Fed’s tightrope might be getting even tighter, and its communication challenges more difficult.
We’re in for an interesting twelve months, and it might all start with the upcoming meeting in December.
Market Insights enewsletter
Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.
Mark Lister
Investment Director
Market Insights enewsletter
Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.