Making sense of market moves
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Just as it looked like Federal Reserve Chair Jerome Powell had successfully pulled off the fabled soft landing—defeating inflation, slashing interest rates, and avoiding a recession all at the same time—politics threw our fearless bespeckled pilot a twist: a second Donald Trump presidency.
The FOMC’s unanimous decision this afternoon to cut rates by a quarter point keeps the Fed on track to continue down the path Powell laid out in September, when the central bank gave rates a massive 50 basis point haircut.
But investors are already looking beyond today’s announcement and wondering how the central bank is going to handle a Trump agenda that economists say could trigger inflation, on top of the already precarious balance it has managed to strike.
The Fed’s September dot plot suggests one more quarter point cut this year. However, some economists expect the Fed to act more cautiously after today’s cut, given that Trump’s high tariffs and deficit-widening fiscal plan could contribute to prices rising once again.
“Predictably, investors had developed unreasonable expectations about the magnitude of rate cuts over the next few quarters and now with a focus on deficits, markets must reorient to reality,” explained Chief Economist for LPL Financial Jeffrey Roach.
Miss Independent no more?
Adding to this already complicated puzzle of economics and politics, Trump’s victory poses a more existential threat to the Fed.
While plenty of presidents have expressed frustration with the central bank, Trump went as far as to suggest that the president should have more direct influence over the independent agency.
While Trump said he won’t fire Powell (who he once called a “bigger enemy” to the US than China’s Xi Jinping) prematurely, he is expected to replace him when Powell’s term is up in 2026.
The big picture: The Fed is designed to be apolitical for good reason. As former Fed Chair William McChesney Martin once famously put it back in 1955, the central bank’s job is to “take the punch bowl away just as the party gets going.”
Trump not only wants to own the proverbial punchbowl, but pick what goes in it.
Only time will tell who makes the first party foul.—LB