DOES THE TRUMP EFFECT MATTER TO FED POLICY?
During the post policy conference, the one question to Jerome Powell that kept repeating itself was about his equations with Donald Trump. To be fair, they have been far from good. In fact, Trump has been openly critical about the approach adopted by Jerome Powell in terms of monetary policy. Back in 2018, Trump felt that raising rates was not a good choice. Trump was also opposed to Powell on aggressive loosening post the pandemic. Currently, Trump is of the view that the Fed should be more cautious about cutting rates too aggressively, since it has potentially inflationary consequences. There have already been reports that Powell may resign from the post to avoid working directly with Trump.
However, in his post policy interaction with the press, Powell has denied any prospects of him resigning. He may be right. It is not within the powers of the President of the US to remove the Fed chair, once the Senate has approved. Powell was appointed in 2018 by Trump for a period of 4 years and later his chairmanship was again extended for another 4 years by Joe Biden. If you go by precedents, it is very unlikely that Trump can make much of an impact on Fed policy or on the tenure of Powell. Also, since Powell’s term end in 2026, anyways, it may just be a good thin for Trump to allow Powell to continue till then. Any change in the Fed chair may only happen after 2026. So, the Trump impact on monetary policy is likely to be limited; and both Trump and Powell are fully aware of that.
SIGNALS WE PICKED UP FROM THE NOVEMBER FOMC MEET
It may be recollected that the November Policy comes nearly 2 months after the Fed cut rates aggressively by 50 bps on September 18, 2024. Here are key takeaways from the monetary policy statement late on November 07, 2024.
In the last 2 months, the Fed has not only taken the initiative to cut rates, but have also front loaded their rate cuts to test the impact and look for early warning signals. The onus is now on the RBI as to how it intends to handle the repo rates. After all, corporate India is already feeling the strain of high interest rates and the current repo rates are already 135 bps above the pre-pandemic levels.
CME FEDWATCH GETS MORE REALISTIC ON TRUMP EFFECT
One way to look at the Fed outlook from a market perspective is to evaluate the CME Fedwatch; which captures the probabilities of rate moves at each upcoming Fed meet. This is based on implied probabilities of Fed Futures trading.
Fed Meet | 225-250 | 250-275 | 275-300 | 300-325 | 325-350 | 350-375 | 375-400 | 400-425 | 425-450 | 450-475 |
Dec-24 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 74.5% | 25.5% |
Jan-25 | Nil | Nil | Nil | Nil | Nil | Nil | Nil | 30.3% | 54.6% | 15.0% |
Mar-25 | Nil | Nil | Nil | Nil | Nil | Nil | 21.7% | 46.6% | 27.1% | 4.7% |
May-25 | Nil | 1.1% | Nil | Nil | Nil | 8.8% | 32.0% | 38.9% | 17.7% | 2.6% |
Jun-25 | Nil | Nil | Nil | Nil | 4.6% | 20.9% | 35.4% | 27.8% | 10.0% | 1.3% |
Jul-25 | Nil | Nil | Nil | 1.2% | 8.9% | 24.8% | 33.6% | 23.0% | 7.5% | 0.9% |
Sep-25 | Nil | Nil | 0.3% | 3.1% | 12.9% | 27.0% | 31.0% | 19.2% | 5.9% | 0.7% |
Oct-25 | Nil | 0.1% | 0.8% | 4.8% | 15.3% | 27.7% | 29.0% | 16.9% | 5.0% | 0.6% |
Dec-25 | Nil | 0.1% | 1.3% | 6.2% | 16.9% | 27.8% | 27.4% | 15.3% | 4.4% | 0.5% |
Data source: CME Fedwatch (# – lower probabilities consolidated)
The CME Fedwatch has been broken up into 3 milestones; December 2024, June 2025, and December 2025. The probabilities of rate cuts and the eventual rates at each of these milestone has been evaluated. This is after the November 25 bps rate cut (taking total rate cuts to 75 bps since September 2024).
Our reading is that by end of 2025, the total rate cuts would most likely by 150 bps and a remotely likely 175 bps. That means if there is a rate cut in December 2024, the total rate cuts in 2025 would be just about 50 bps to 75 bps. Clearly, the CME Fedwatch appears to have tone down its dovishness substantially. Is that the Trump Effect at play? We have to wait to find out!
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