Jai Hamid
The Federal Reserve dropped its benchmark lending rate by a quarter point on Thursday, cutting the federal funds rate to a 4.5%–4.75% range.
This comes just days after Trump’s re-election, sending a message that the Fed isn’t fazed when it comes to managing the economy—even if the new political climate might make their job hell.
This is the second rate cut in a row after the Fed’s larger half-point cut in September, a signal that it’s still trying to stabilize the economy against inflation, employment issues, and now, an unpredictable White House.
The vote was unanimous, with Fed Chair Jerome Powell leading the charge. In its statement, the Federal Open Market Committee (FOMC) tried to sound diplomatic but couldn’t hide the anxiety lurking beneath. “The economic outlook is uncertain,” the Fed said, clearly walking a tightrope.
Risks are “roughly in balance” between keeping inflation under control and helping people stay employed, the Fed added—no doubt aware that Trump’s return could throw everything out of whack. The Fed also admitted that while inflation has made some headway toward their goal, there’s still a long way to go.
Trump’s policies will bring more pressure on Fed
The president’s economic plans have already got the Fed sweating bullets. His agenda—more tax cuts, higher tariffs, and clamping down on immigration—is practically designed to pump up inflation. More inflation means higher prices on the basics, and let’s not forget that this man already has a history of blaming the Fed, especially Powell, for any economic “bad news.”
This rate cut might be a defensive move, but it doesn’t guarantee any future cuts. It’s also clear the Fed wants to take things slow; they’ve already shifted from major, dramatic cuts to these quarter-point nibbles, calling for a “measured” approach.
It’s an open question whether this will work with Trump’s economy barreling down the tracks like a runaway train. And let’s face it, if Trump’s policies hike prices, the Fed might be forced to pump the brakes on rate cuts altogether.
Market watchers are already betting that another quarter-point cut will come in December. Traders saw this cut coming from a mile away and aren’t shocked in the slightest. They’re still guessing, though, on how much room the Fed has left to maneuver.
The markets barely moved—the S&P 500 held its ground, Treasuries made minor moves, and the dollar didn’t even flinch. It’s like the whole market is holding its breath, waiting to see just how messy things get with Trump back in the game.
Economic growth stays strong, but signs of a slowdown
On the surface, the economy’s still flexing some muscle. In the third quarter, it grew at an annualized rate of 2.8%. Consumer spending has stayed solid, and fears of a job market meltdown haven’t exactly panned out. October’s job numbers were weak—only 12,000 new positions—partly thanks to wild weather and a major strike. Revisions to earlier months’ figures also showed a dip, but it’s far from a disaster.
Inflation, though, is a mixed bag. Over the past year, prices rose at a pace of 2.1%, just above the Fed’s 2% target. The central bank’s preferred inflation metric logged its biggest monthly jump since April, and that’s got people talking.
Deutsche Bank’s economists have adjusted their predictions, now expecting inflation to hang at around 2.5% next year instead of the previous estimate of 2.2%. They’re also betting that inflation will stick at 2.5% all the way through the fourth quarter of 2026.
In other words, the road to 2% could be longer than the Fed planned, and it may need more than a quarter-point trim here and there to get there.
Before Trump’s win, Treasury yields were already on the rise, bringing mortgage rates up with them, a bad sign for the already tight housing market. The S&P 500 hit record highs after Trump’s win, signaling that investors are still feeling bullish. But higher mortgage rates don’t bode well for the average person trying to buy a home.
Trump’s plans will add to inflation
Let’s break down Trump’s inflation-triggering agenda. He’s already talking about ramping up tariffs and putting more limits on immigration. Those moves could make goods more expensive, and restricting immigration is another way to drive up wages, which then drives up prices.
Migrants have been crucial in the labor market, and a smaller workforce could mean higher wages across the board. All this screams inflation—and the Fed knows it.
Treasury yields shot up on Wednesday after Trump’s policies started making the rounds. Deutsche Bank analysts aren’t convinced inflation will drop anytime soon, pointing out that inflation could stall out at high levels. The takeaway? The Fed might be stuck dealing with high inflation longer than planned, and that could mean fewer rate cuts.
Morgan Stanley’s team added fuel to the fire, pointing out that Trump’s China tariffs might hit global spending and corporate confidence harder than anyone’s talking about. They drew lessons from the 2018-19 trade war with China, saying it’s not just about levies on goods but about how it could shake the entire economy.
Then there’s the question of the Fed’s “neutral rate.” This rate is basically the sweet spot where the economy’s neither too hot nor too cold.
After the half-point cut in September, people started wondering if the Fed needed to raise this neutral rate to match a faster economy. But with Trump’s unpredictable policies, guessing the Fed’s next moves is anyone’s game.
Global central banks react to economic shifts
Around the world, central banks are playing their own game of rate hopscotch. The Bank of England cut rates twice this year but didn’t go all-in on more cuts. Japan, on the other hand, saw a spike in workers’ base salaries, which could signal a rate hike soon.
In Sweden, the Riksbank went ahead with a half-point cut and promised more easing down the line. Norway’s central bank kept rates steady but hinted it could raise them soon. Over in the UK, house prices broke records in October as demand surged.
Brazil’s central bank went the opposite route, cranking up rates by half a percentage point, and explicitly calling for spending cuts to tame above-target inflation.
Then there’s the ripple effect of Trump’s tariffs on China. Australia, of all places, might end up in the crossfire, with a senior Reserve Bank official pointing out that large U.S. tariffs on China could have “adverse effects” on the Aussie economy.
With Trump set to impose new, steeper tariffs on China, economists like Chetan Ahya from Morgan Stanley warn that the fallout might hit global spending more than the direct effect of the tariffs themselves. The bigger concern is corporate confidence—companies hate uncertainty, and these tariffs bring nothing but.
China’s economy is likely to take a hit, but perhaps not as hard as in the previous trade war. China’s reliance on the U.S. market has dropped since 2018, but policy support could still be critical to absorb the blow.
