Fed cuts rates by 25 bps in November, despite the Trump Effect

11 Nov 2024 , 10:39 AM

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.

• The decision to cut rates by 25 bps in November was almost unanimous. This takes the Fed rate to the range of 4.50%-4.75% and reflects a full 75 bps rate cut from the peak levels. That is a relatively aggressive start by the Fed, with just 1 more meet left in 2024.
• Why did the Fed not go for the jugular with another 50 bps rate cut to substantially front-load the rate cuts. There could be two reasons for that. The first reason is that growth has picked up with GDP growth in Q2-2024 turnaround from 1.5% to 3.0% and the first estimate of Q3-2024 GDP growth coming in at 2.8%. The much feared hard landing seems to be off the table for now. Also, the unemployment had spiked to 4.3% in July, but has since tapered down to 4.1%, indicating jobs is not such a big issue.
• Inflation has been a two-way street. For instance, if you look at the PCE inflation for September 2024, it had come in at 2.1%. That is very close to the eventual Fed target of 2.0%. However, much of the inflation tapering has happened due to the fall in oil prices and West Asia remains volatile. In recent months, food inflation has been erratic while core inflation has stayed sticky at 2.7%. That has forced a cautious stance by the Fed.
• According to Powell, this additional 25 bps rate cut will keep the flow of funds in the economy smooth and ensure that liquidity does not stifle growth. More so, since the unemployment numbers are still above 4% and well above the full employment levels. Also, the addition of just 12,000 non-farm payrolls in October shows that there are still pockets of weakness in the labour market.
• A lot will depend on the pace of future rate cuts. For now, Powell has denied the changed political equations could even remotely influence his monetary policy stance. Of course, the Fed remains flexible and would be ready to slow its aggression in cutting rates should growth and labour market display a perceptible bounce.
• If one were to go by the indications coming from the dot plot chart of the FOMC members, there is a strong possibility that there could be another 25 bps rate cut in December to complete 100 bps rate cut by end of 2024. As far as 2025 is concerned, the most likely scenario is another 75 bps to 100 bps rate cut by end of the year.

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).

• With 50 bps rate cut in September and another 25 bps in November, the action now shifts to the last meeting of the year in late December. The CME Fedwatch assigned a probability of 74.5% to another 25 bps rate cut and 25.5% probability of status quo.
• Probabilities beyond 2024 are still evolving and will offer more clarity once the current year action is fully known by end of December. Let us look at June 2025. The CME Fedwatch is assigning 89.7% probability for 125 bps rate cuts from the peak and 60.9% chance for 150 bps rate cuts from the peak by June 2025.
• Let us come to the final milestone of December 2025. At this point, the CME Fedwatch is estimating 79.8% probability for 150 bps of rate cuts from the peak and a probability of 46.4% for 175 bps of rate cuts by December 2025. There is a 24.5% probability that the Fed could close year 2025 having cut rates by a full 200 bps from peak and moved to (3.25%-3.50%).

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!