Original | Odaily Planet Daily (@OdailyChina)
Author | Nan Zhi (@Assassin_Malvo)
Yesterday, Trump won the U.S. election, leading Bitcoin to break through its historical high, reaching a peak of 76,400 USDT, and the cryptocurrency market also rose collectively. The U.S. election is the most critical event following the Bitcoin spot ETF and Ethereum spot ETF, and after the election, the pace of the Federal Reserve's interest rate cuts has become one of the few core issues at the macro level.
At 3 a.m. this Friday, the Federal Reserve will announce its rate decision. How much will they cut this time? Will there be significant monetary 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 probability of a 25 basis point rate cut by the Federal Reserve in November is nearly fully priced in, currently reported at 96.8%.
According to Jinshi reports, considering that Federal Reserve Chairman Powell has previously stated that a reasonable pace of interest rate cuts should be 25 basis points, combined with the relatively stable performance of economic data over the past two months, despite the significant weakness in October's non-farm payrolls, which is greatly affected by one-off factors. Hence, a 25 basis point rate cut by the Federal Reserve this week is still a high probability event, rather than another 50 basis point cut or no cut at all.
Impact of expansionary fiscal policy after Trump's victory
JPMorgan analyst David Kelly stated on Tuesday that the Federal Reserve will almost certainly cut interest rates by 25 basis points in the rate decision on Friday, even if the election takes place beforehand. However, Kelly further stated that if Trump wins the U.S. election this week, the Federal Reserve may pause its easing cycle as early as December, as Trump's expansionary fiscal policy plan will raise inflation and prevent interest rates from falling.
Kelly pointed out, 'If Trump wins the election, he will implement more expansionary fiscal policies, which may trigger a trade war, increase the deficit, and raise interest rates.'
The December rate cut remains undecided
Trump has successfully won the election, and as Kelly mentioned in the previous section, his policies will change the market economy and inflation situation. Analysts from Edmond de Rothschild Group stated in a report that under Trump's leadership, U.S. inflation may rise rapidly. Specifically, the risks of trade tariffs and the threat of expelling undocumented immigrant workers may drive up U.S. inflation rates. These factors may pose challenges to the Federal Reserve's efforts to curb inflation. They stated: 'As the impact of Trump's plans on inflation becomes increasingly clear, the Federal Reserve may partially abandon its expected 100 basis point rate cut plan in its latest report.'
CME FedWatch data shows that the probability of maintaining the 450-475 basis points range in December is 32.7%, the probability of further cutting to 425-450 basis points is 65.2%, and there is a 2.1% probability of cutting another 25 basis points.
Nordea Bank analysis states that with Trump's victory in the U.S. election and the Republican Party likely to control both the House and the Senate, the market should expect that most of his campaign promises will be fulfilled.
The Federal Reserve may automatically cut rates by 25 basis points tonight and in December, as they believe the current interest rates are restrictive. If the current strong economic development continues, coupled with the impact of Trump's victory, the Federal Reserve should soon become less certain about whether these preemptive rate cuts are necessary.
The impact of Trump's policies on inflation will take some time to reflect in CPI data, but we should start seeing effects on increased hiring and lower immigration early next year. We are uncertain about when the Federal Reserve will ultimately decide to stop cutting rates, but it is most likely that the Federal Reserve will again cut rates by 25 basis points in March of next year before the dovish FOMC is convinced, although there is also a significant possibility that there will be no rate cuts in 2025.
What is the mid-term situation? Rate cuts may be nearing their end
Fund management company Navellier stated that this expected interest rate cut by the Federal Reserve may be the last one, as the Federal Reserve does not like to go against market interest rates. However, the specifics still depend on the FOMC statement and Federal Reserve Chairman Powell's press conference on Friday.
Not only do many views suggest that the mid-term of the Federal Reserve's rate cuts has entered its final stage, but market data also shows the same tendency. According to Jinshi reports, interest rate futures traders continue to bet that the Federal Reserve will cut rates by 25 basis points this week and in December, but now expect that the Federal Reserve may stop cutting rates after two cuts of 25 basis points in the first half of 2025, bringing the target range of the federal funds rate down to 3.75%-4%.
The underlying logic of Trump's victory and the pace of interest rate cuts
Why will Trump's victory ultimately lead to a slowdown or even an end to interest rate cuts? CICC provided a specific explanation in a research report:
The report points out that the U.S. real GDP for the third quarter of 2024 grew at an annualized rate of 2.8%, slightly lower than the market expectation of 3.0%, and also a slight decline from the 3.0% in the second quarter, but still a bright report.
In terms of sub-items, personal consumption expenditure is strong, corporate equipment investment is expanding, and exports and government spending are accelerating, indicating that the growth of the U.S. economy is still healthy. Relatively weak are real estate investment and construction investment, showing that high interest rates are still having a suppressive effect. Additionally, inflation fell further in the third quarter, suggesting that the U.S. economy is moving towards a soft landing. CICC believes that the Federal Reserve does not need to make significant interest rate cuts for now.
In ordinary hypothetical situations, CICC expects the Federal Reserve to continue to cut interest rates, but the pace of rate cuts will slow down, and the terminal (neutral) interest rate may also be higher than the benchmark scenario of 4%.
In extreme hypothetical situations, the Federal Reserve's stance will turn 'hawkish' and restart interest rate hikes in 2025, as decision-makers are unlikely to tolerate inflation rising back above 5%. Considering that curbing inflation generally requires the nominal policy interest rate to be above inflation (i.e., the real policy interest rate to be positive), this means the Federal Reserve may need to raise rates by 75 to 100 basis points in 2025.
