Original | Odaily Planet Daily (@OdailyChina)

Author | Nan Zhi (@Assassin_Malvo)

Yesterday, Trump won the US election, leading Bitcoin to break historical highs, reaching a peak of 76,400 USDT, with the entire crypto market rising accordingly. The US election is the most critical event following the Bitcoin spot ETF and Ethereum spot ETF, and after the election, the pace of Fed rate cuts has become one of the few core issues at the macro level.

At 3 AM this Friday, the Federal Reserve will announce its interest rate decision; how much will they cut this time? Will there be significant easing in the coming months? Odaily will summarize various viewpoints in this article.

A 25 basis point rate cut in November is a done deal.

The market has priced in a 25 basis point rate hike

First, on the data front, according to CME FedWatch, the Fed's rate cut of 25 basis points in November is nearly fully priced in, with a current probability of 96.8%.

According to Jinshi News, considering that Fed Chairman Powell has previously stated that a reasonable rate cut speed should be 25 basis points, combined with the relatively stable performance of economic data over the past two months, despite a significant weakening of October's non-farm payrolls influenced by one-time factors, a 25 basis point rate cut by the Fed this week remains a high probability event, rather than a repeated 50 basis point cut or no cut at all.

Impact of expansionary fiscal policy after Trump's victory

J.P. Morgan analyst David Kelly stated this Tuesday that the Fed will almost certainly cut rates by 25 basis points in Friday's rate decision, even if the election takes place beforehand. However, Kelly further stated that if Trump wins the US election this week, the Fed may pause its easing cycle as early as December, as Trump's expansionary fiscal policy plans will push inflation higher and prevent rates from falling.

Kelly pointed out, 'If Trump wins the election, he will adopt a more expansionary fiscal policy, which may trigger a trade war, increasing the deficit and raising interest rates.'

The December rate cut remains undecided

Trump has successfully won the election. As Kelly mentioned in the previous section, Trump's election will change the market economy and inflation situation. Analysts from Edmond de Rothschild Group stated in a report that under Trump's leadership, US inflation may rise rapidly. Specifically, the risks of trade tariffs and the threat of deporting undocumented immigrant workers may drive up the US inflation rate. These factors could pose challenges to the Fed's efforts to curb inflation. They stated: 'As the impact of Trump's plans on inflation becomes increasingly clear, the Fed may partially abandon its expected 100 basis point rate cut plan in its latest report.'

CME FedWatch data shows a 32.7% probability of maintaining the 450-475 basis points range in December, a 65.2% probability of further cutting to 425-450 basis points, and a 2.1% probability of cutting another 25 basis points.

Nordea Union Bank analysts state that with Trump's victory in the US election, and the likelihood of the Republican Party controlling both the House and Senate, the market should expect most of his campaign promises to be fulfilled.

The Federal Reserve may automatically cut interest rates by 25 basis points tonight and in December, as they believe the current rate is restrictive. If the current strong economic development continues, along with the impact of a Trump victory, the Federal Reserve should soon become less certain about the necessity of these preemptive rate cuts.

The impact of Trump's policies on inflation will take some time to manifest in CPI data, but we should start seeing the effects on more hiring and lower immigration early next year. We are uncertain when the Fed will ultimately decide to stop cutting rates, but the most likely scenario is that the Fed will cut rates by 25 basis points again in March next year before the dovish FOMC is persuaded, although it is also quite likely that they will not cut rates in 2025.

What about the mid-term situation? Rate cuts may be nearing an end.

Fund management company Navellier stated that the anticipated Fed rate cut this time may be the last, as the Fed does not like to go against market rates. However, the specifics still depend on Friday's FOMC statement and Fed Chairman Powell's press conference.

Not only do many viewpoints suggest that the mid-term rate cuts by the Fed are approaching an end, but market data also shows the same tendency. According to Jinshi News, interest rate futures traders continue to bet that the Fed will cut rates by 25 basis points this week and in December, but now expect the Fed may stop cutting rates after two cuts of 25 basis points in the first half of 2025, lowering the federal funds rate target range to 3.75%-4%.

Underlying logic of Trump's victory and the pace of rate cuts

Why will Trump's victory ultimately lead to a slowdown or even an end to rate cuts? CICC provided a specific explanation in a research report.

The report points out that the annualized quarter-on-quarter real GDP in the US for Q3 2024 is 2.8%, slightly lower than the market expectation of 3.0%, and a slight decline from 3.0% in Q2, but still a remarkable result.

On a component basis, personal consumption expenditures are strong, corporate equipment investment is expanding, and exports along with government spending are accelerating, indicating that US economic growth remains healthy. Relatively weak are real estate investment and construction investment, showing that high rates are still exerting a suppressive effect. Moreover, inflation further declined in Q3, indicating that the US economy is heading towards a soft landing. CICC believes the Fed does not need to cut rates significantly at this time.

Under normal assumptions, CICC expects the Fed will continue to cut rates, but the pace of cuts will slow, and the terminal (neutral) rate may be higher than the baseline scenario of 4%.

In an extreme hypothetical scenario, the Fed’s stance would turn 'hawkish' and restart rate hikes in 2025, as policymakers are unlikely to tolerate inflation rising back above 5%. Considering that curbing inflation generally requires the nominal policy rate to be above inflation (i.e., a positive real policy rate), this means the Fed may need to raise rates by 75 to 100 basis points in 2025.