Lost in the excitement of election week was a meeting of the Federal Reserve. At its conclusion, interest rates were lowered by another quarter-point. But where they are heading from here is a matter of increasing uncertainty.
Conditions in the United States have continued to fall into line with a soft landing scenario. Last week’s easing was well-previewed and well-justified.
As always, the Fed’s decisions will be based on data and expectations of future developments. As we discussed in our post-election analysis, the Republican platform (if implemented to the fullest) is likely to result in higher growth, higher inflation and larger budget deficits in the medium term.
All of those things will tend to place upward pressure on interest rates. Markets have made substantial changes to their collective expectations for Fed policy: the implied overnight rate for the end of 2025 has risen by almost 100 basis points in the last six weeks.
With new appointments, the Fed’s monetary and regulatory posture could gradually shift.
Fed Chairman Jerome Powell was asked several times in his post-meeting press conference about the influence of the election on the potential path of Fed policy. He deflected all of them deftly, pausing only to repeat his belief that U.S. fiscal policy is on an unsustainable path. He also responded tersely to questions about whether the President has the right to dismiss the Fed leader.
Fed officials will be updating their forecasts in the coming weeks. The outcomes will be amalgamated and released at the conclusion of the central bank’s next meeting on December 18. It will be very interesting to see whether the potential policy changes color the outlook, or the perceptions of risks to inflation and employment.
The Fed is also a primary regulator of banks. The incoming administration will likely take a lighter touch in this area; the Fed did so in 2018 at the direction of Randal Quarles, who Donald Trump had nominated. The lead supervision position on the Board of Governors will open in mid-2026.
As we noted in our recent defense of Fed independence, the tone of monetary and regulatory policy will change gradually with new appointments to the Fed. Governors rarely serve out their full 14-year terms, so openings are likely. Unlike Trump’s first term, when a Democratic Senate blocked one candidate, White House appointments may get a smoother path to approval this time around. Until those roles open, however, friction between the White House and the Fed is likely to intensify.
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