WASHINGTON (AP) — Federal Reserve officials are poised Thursday to reduce their key interest rate for a second straight time, responding to a steady slowdown of the inflation pressures that exasperated many Americans and contributed to Donald Trump’s presidential election victory.
Yet the Fed’s future moves are now more uncertain in the aftermath of the election, given that Trump’s economic proposals have been widely flagged as potentially inflationary. His election has also raised the specter of meddling by the White House in the Fed’s policy decisions, with Trump having proclaimed that as president he should have a voice in the central bank’s interest rate decisions.
The Fed has long guarded its status as an independent institution able to make difficult decisions about borrowing rates, free from political interference. Yet during his previous term in the White House, Trump publicly attacked Chair Jerome Powell after the Fed raised rates to fight inflation, and he may do so again.
The economy is also clouding the picture by flashing conflicting signals, with growth solid but hiring weakening. Even so, consumer spending has been healthy, fueling concerns that there is no need for the Fed to reduce borrowing costs and that doing so might overstimulate the economy and even re-accelerate inflation.
Financial markets are throwing yet another curve at the Fed: Investors have sharply pushed up Treasury yields since the central bank cut rates in September. The result has been higher borrowing costs throughout the economy, thereby diminishing the benefit to consumers of the Fed’s half-point cut in its benchmark rate, which it announced after its September meeting.
The average U.S. 30-year mortgage rate, for example, fell over the summer as the Fed signaled that it would cut rates, only to rise again once the central bank actually cut its benchmark rate.
Broader interest rates have risen because investors are anticipating higher inflation, larger federal budget deficits, and faster economic growth under a President-elect Trump. In what Wall Street has called the “Trump trade,” stock prices also soared Wednesday and the value of bitcoin and the dollar surged. Trump had talked up cryptocurrencies during his campaign, and the dollar would likely benefit from higher rates and from the across-the-board increase in tariffs that Trump has proposed.
Trump’s plan to impose at least a 10% tariff on all imports, as well as significantly higher taxes on Chinese goods, and to carry out a mass deportation of undocumented immigrants would almost certainly boost inflation. This would make it less likely that the Fed would continue cutting its key rate. Annual inflation as measured by the central bank’s preferred gauge fell to 2.1% in September.
