What’s New?
Without question, the most momentous development since the last meeting has been the victory of Republican candidate Donald J. Trump. The ‘Red Sweep’, which saw the president take all seven of the contested ‘swing states’, has handed Republicans control not only of the White House but also the other two major branches of government.[1]
While still early days, it is reasonable to speculate that the coming administration will effect major changes, and that these changes will have knock-on effects for investors at home and abroad. Already announced policies include steep tariffs on major importers, including China[2], and stricter enforcement of immigration policy.[3] More generally, many are expecting deregulation[4] and looser government spending[5] in the months and years to come.
If any or all of these changes materialize, commentators have observed that the probable effect would be inflationary[6], and hence, likely to slow, halt, or even reverse the current policy of monetary easing. However, until the president has officially taken office and the policies are enacted, nothing is certain.
What the Fed Discussed
The published minutes for the Fed’s November meeting, which took place directly after the election results, make no direct reference to Trump’s victory or its implications.[7]
The focus of the discussion was, as usual, the available economic data. While the decision to cut was unanimous, the notes imply a lack of consensus about the future path. This is due to the ambiguous nature of the data.
In spite of highly restrictive monetary policy, economic growth has been strong[8]. Furthermore, inflation is down but not quite ‘out’, with Core Personal Consumption Expenditure Price Index (“Core PCE”), the key target measure, showing a sideward, rather than downward trajectory, and still elevated in comparison to its target of 2.0% (see chart below).[9]
On the other hand, the impact of interest rates takes time to work its way through the system. This means it is important to keep an eye on the road ahead as well as the rear-view mirror. Employment, the Fed’s second mandate alongside controlling inflation, showed a slight weakening in October[10], which could be a sign that rates are beginning to bite.
Powell’s press conference after the meeting put a positive spin on the above. Rather than framing it as a ‘rock and a hard place’ scenario, he reiterated his previous view that the Fed is ideally poised to move in either direction as more data becomes available.[11]
Where Do We Go From Here?
The latest inflation reading released on November 27, showing a slight uptick in PCE inflation, adds to the nuanced economic outlook facing the Fed.
Source: Bureau of Economic Analysis
Chairman Jerome Powell commented in a public appearance on November 14 that there is ‘no rush’ to cut rates[12], implying that the best guess currently is a gradual decline rather than a steep one. Some commentators have even speculated that 2025 might be a year of no cuts at all, if the Trump policies are implemented as proposed.[13]
The markets have fluctuated in their response, but currently reflect a 71% probability of a cut in December.[14]
What are we to make of the above? Rather than try to guess a move that the Federal Reserve itself has not yet decided, we think that the disparity of opinions points to the need for caution rather than false certainty. Instead of going all-in on either side of the debate, maintaining a position of agility, allowing movement in either direction - as Chairman Powell aims to do himself - is a wiser move.
[6] Letter from 16 Nobel Economists
[9] Bureau of Economic Analysis