The current statements from Federal Reserve officials about possibly continuing to cut interest rates have led investors to maintain expectations of a rate cut during the meeting on December 17-18. However, the extent of future rate cuts remains undecided. The upcoming release of the Federal Reserve's meeting minutes will spark a crucial debate that will shape the financial landscape faced by the Trump administration.
The minutes will detail the discussions from the November 6-7 meeting, when officials were responding to stronger-than-expected economic growth and inflation data. Although non-farm payroll growth slowed in October, policymakers still felt that the U.S. economy was consistently exceeding expectations. Federal Reserve Chairman Powell stated after the 25 basis point rate cut on November 7 that the U.S. economy was performing admirably, with strong growth, a healthy labor market, and declining inflation. He also indicated that the Fed was moving towards a more neutral stance and did not commit to a rate cut in December.
Public comments following the meeting highlighted the divisions among Federal Reserve officials: some believe that interest rates are near neutral and close to pausing rate cuts; others expect a longer rate-cutting cycle. A week later, Powell stated that there were no urgent signals for rate cuts, allowing for cautious decisions on whether to further lower borrowing costs, which led to a decline in market expectations for a rate cut in December.
The Trump effect is also in play. Official Cook focuses on alleviating inflation and improving productivity, while Bowman indicated that inflation progress has stagnated in recent months. The Federal Reserve may be closer to a neutral policy stance, which could mean a reduction in the overall number of rate cuts. Trump's campaign policies of tax cuts, limiting immigration, and increasing import tariffs may exacerbate inflation and wage pressures, prompting the Federal Reserve to be more cautious about rate cuts. Investors now expect the Federal Reserve's benchmark interest rate to drop to around 3.9% next year, which is 1 percentage point higher than the level predicted by policymakers in September. The market may face a 'major shock' tonight due to these uncertainties, and all parties are watching closely.
