As the Federal Reserve gets ready to update monetary policy this afternoon, Donald Trump's convincing election win, which looks likely to deliver Republicans control of Congress, has already shaken up the expected trajectory of further rate cuts. Markets have reacted swiftly, with the S&P 500 tacking on further gains after Wednesday's surge both stock prices and the 10-year Treasury yield.
The expected GOP sweep — Republicans are in good shape to keep control of the House — won't keep the Fed from reducing its benchmark rate by a quarter-point today. That's much too soon for policymakers to contemplate any impact from the Trump agenda of tax cuts, tariffs, deregulation and less immigration. However, odds of further rate cuts in December and beyond have taken a step back on the political realignment.
How Fed Rate-Cut Odds Have Shifted
Markets are still pricing in 100% odds of a 25-basis-point rate cut announcement at 2 p.m. ET Thursday, according to CME Group's FedWatch page. However, odds of a further quarter-point cut on Dec. 18 have fallen to 69% from 77% just before Trump's election.
The bigger change is in the outlook for rate cuts in 2025, once Trump begins to implement his policies. Despite the surprisingly soft October jobs report on Nov. 1, markets now see 55% odds that the Fed's key rate will only fall as low as 3.75% to 4% by the end of next year. Assuming quarter-point cuts tomorrow and on Dec. 18, that implies just 50 basis points worth of cuts in 2025 — instead of a full percentage point in rate cuts penciled into Fed projections issued on Sept. 18.
Impact Of Trump Tariffs, Tax Cuts
In a Wednesday note, Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote that a 10% tariff applied to all imports could boost core inflation by eight-tenths of a percentage point next year.
"A renewed downturn now looms for the manufacturing sector" amid retaliation by foreign governments and a stronger dollar, which makes exports less competitive, Tombs wrote.
Pantheon, which has had a dovish outlook, raised its projection of the year-end 2025 federal funds rate by 75 basis points to a range of 3.25% to 3.5%. However, the firm said it will revise its federal funds rate outlook still higher "if it becomes clear that the Republicans also hold the balance of power in the House, creating the prospect of tax cuts and an increasing budget deficit in 2026."
Nomura's U.S. economics team led by David Self and Aichi Amemiya wrote Wednesday that they now expect just one Fed rate cut in 2025, "with policy on hold until the realized inflation shock from tariffs has passed."
Deutsche Bank had been predicting that the Fed's key policy rate will bottom around 3.5% by next fall. However, a Trump-led GOP sweep might mean that the Fed's interest-rate floor will only fall to 3.75% or even 4.25%, Deutsche Bank chief U.S. economist Matthew Luzzetti wrote in an Oct. 22 note.
"If Trump were to front-load fiscal stimulus before pursuing a trade war, it would be hawkish for the Fed," he wrote. That's how Trump proceeded in his first term, passing tax cuts in 2017 before ratcheting up his trade war starting in 2018. Yet if tariffs are on a faster track, the Fed's floor might fall as low as 3% amid the economic fallout, Luzzetti said.
Stock Market Rises Ahead Of Fed Decision But Donald Trump Stock Plunges
What Will Fed Chair Jerome Powell Say?
Federal Reserve Chairman Jerome Powell will likely stay in his lane and tiptoe around any questions about forthcoming Trump administration policies. He'll make clear that the Fed is laser-focused on economic conditions. It isn't part of the Fed's job description to anticipate the impact of fiscal and trade policies by adjusting policy. He may note that the Fed pivoted to rate cuts amid too-low inflation during Trump's China trade war in 2019, underscoring that the impact of tariffs on inflation and economic growth will depend on many factors that are hard to predict.
Still, the Fed sped up rate hikes back in 2018 to keep the economy from overheating thanks to the 2017 Trump tax cuts. Arguably, economic conditions were more ripe for Trump's tax cuts and tariffs at the outset of his first term. Back when he won in 2016, inflation was too low, not too high. The Fed's key interest rate was below 1%, not close to 5%. And the federal budget deficit, equal to 3.1% of GDP, was less than half its bloated level in 2024.
S&P 500
The S&P 500 added 0.7% in midday Thursday trade, after jumping 2.5% to a new record high in Wednesday stock market action.
On Wednesday, the 10-year Treasury yield leapt 14 basis points to 4.43%, the highest since late June, but it has since backed down to 4.35%.
Through Wednesday, the S&P 500 is up 24.3% year to date.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
