The Federal Reserve will cut rates again while facing a negative post-election outlook

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WASHINGTON (AP) – No one knows how Tuesday’s presidential election will go, but the Federal Reserve’s move two days later is pretty easy to predict: As inflation continues to cool, the Fed will cut interest rates for the second time this year. .

The presidential race may not be resolved when the Fed ends its two-day meeting on Thursday afternoon, but that uncertainty will not affect its decision to continue reducing its rate of interest. The Fed’s future actions will change dramatically when a new president and Congress take office in January, especially if Donald Trump wins the White House again.

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Trump’s proposals to impose higher tariffs on all imports and to deport more illegal immigrants and his threat to waive the Fed’s independent rate decisions could cause inflation to rise, economists say. Higher inflation will also force the Fed to reduce or stop its rate cuts.

On Thursday, Fed policymakers, led by Chairman Jerome Powell, are on track to cut their quarterly rate to around 4.6%, after a half-point cut in September. Economists expect a quarter-point rate cut in December and possibly more such measures next year. Over time, rate cuts tend to lower the cost of borrowing for consumers and businesses.

The Fed cuts its rate for a different reason than it usually does: It usually lowers rates to boost a weak economy and a weak job market by encouraging more borrowing and spending. But the economy is growing strongly, with the unemployment rate at a low 4.1%, the government reported Friday, even as hurricanes and a Boeing strike severely dampened job growth last month.

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Instead, the central bank lowered rates as part of what Powell called a “recalibration” of inflation. When inflation rose to a fourteen-year high of 9.1% in June 2022, the Fed went on to raise rates 11 times – eventually sending its key rate to around 5.3%, the highest in four decades.

But in September, year-over-year inflation eased to 2.4%, just above the Fed’s 2% target and equal to its level in 2018. Since inflation has fallen so far, Powell and other Fed officials say they think higher levels of borrowing are no longer necessary. High levels of borrowing often limit growth, especially in interest-sensitive sectors such as real estate and auto.

“This limit is there because inflation has increased,” said Claudia Sahm, chief economist at New Century Advisors and a former Fed economist. “Inflation is no longer rising. The reason for the ban is gone.”

Fed officials have suggested that their rate cuts will be gradual. But almost all have expressed support for further cuts.

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“For me, the main question is how much and how fast to reduce the rate target (the Fed’s key), which I believe is currently set at a moderate level,” Christopher Waller, an influential member of the Fed’s Board of Governors, said in a previous speech.

Jonathan Pingle, an economist at Swiss bank UBS, said Waller’s sentence showed “unusual confidence and certainty that rates will fall.”

Next year, the Fed will likely begin to wrestle with the question of how low their interest rate should go. Ultimately, they may want to set it to a level that does not inhibit or stimulate growth – “neutral” in the Fed’s parlance.

Powell and other Fed officials admit they don’t know exactly where the neutral rate is. In September, the Fed’s rate-setting committee estimated it was 2.9%. Most economists think it’s closer to 3% to 3.5%.

The Fed chairman said officials should assess where neutrality lies in how the economy responds to rate cuts. For now, most officials are confident that at 4.9%, the Fed’s current rate is above neutral.

Some economists argue, however, that since the economy looks healthy even with high levels of borrowing, the Fed does not need to ease the debt much, if at all. The idea is that they may already be close to an interest rate that does not reduce or stimulate the economy.

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“If the unemployment rate stays in the low 4’s and the economy is still going to grow at 3%, does it matter if the (Fed’s) rate is 4.75% to 5%?” said Joe LaVorgna, chief economist at SMBC Nikko Securities, asked. “Why are they cutting now?”

With the Fed’s latest meeting coming after Election Day, Powell will likely field questions at his news conference on Thursday about the outcome of the presidential race and how it could affect the economy and inflation. It can be expected that he will also say that the decisions of the Fed are not affected by politics at all.

During Trump’s administration, he imposed tariffs on washing machines, solar panels, steel and a number of goods from China, which President Joe Biden has taken care of. Although research shows that the prices of washing machines increased as a result, overall inflation did not rise significantly.

But now Trump is proposing broad tariffs — essentially, import tariffs — that could raise prices 10 times higher than most goods from overseas.

Many mainstream economists are shocked by Trump’s latest proposed tariffs, which they say will likely reignite inflation. A report by the Peterson Institute for International Economics concluded that Trump’s main tariff proposals would make inflation two percent higher next year than it would otherwise be.

The Fed may raise tax rates this time, according to economists at Pantheon Macroeconomics, “as Trump threatens a big tax hike.”

“Therefore,” they wrote, “we will lower the rate of inflation in our 2025 forecasts if Trump wins.”

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