(Reuters) – Donald Trump’s election as U.S. president is fueling financial market bets that the Federal Reserve will make fewer interest rate cuts next year, with expectations that a raft of new policies will be made when he takes over. in office will halt the downward progress of inflation.
Traders continue to price in a 25 basis point interest rate cut at the Fed’s policy meeting on Thursday, and a strong likelihood of another cut in December, which would take the key rate to a range of 4.25% and 4.50%.
But they now expect only two more cuts next year, rather than the four that Fed officials had predicted in September based on prices in interest rate futures markets.
This would put the rate in the range of 3.75% to 4.00%, 1 percentage point below the current rate and probably no lower. In September, most Fed officials expected interest rates to end 2025 below 3.5%.
Trump campaigned on promises to fix what he sees as a struggling economy, and to do so he intends to impose higher tariffs, cut taxes and slow immigration.
Economists say these policies will likely lead to faster economic growth and a tighter labor market which, combined with higher import costs, would put upward pressure on prices.
But the impact of Trump’s policies may take time to be felt, some analysts have warned.
“The delay in the inflationary implications of tariffs and expansionary fiscal policy allows the Fed to continue cutting interest rates through 2026, as the central bank still needs to recalibrate monetary policy to be less restrictive,” the Oxford analysts wrote Economics.
(Reporting by Ann Saphir)
Interview Between Time.news Editor and Financial Expert on Market Reactions to Trump’s Presidency
Time.news Editor (T): Welcome to today’s discussion! We have a special guest with us, Dr. Emily Grant, a leading economist and financial analyst, to help us unpack the implications of Donald Trump’s election on the financial markets. Welcome, Dr. Grant.
Dr. Emily Grant (E): Thank you for having me! It’s great to be here.
T: Let’s dive right in. There’s been a noticeable shift in market sentiment following Trump’s election. Can you explain what’s driving these financial market bets?
E: Absolutely. The market reaction is largely fueled by expectations of a more aggressive fiscal policy under Trump’s administration. Many investors anticipate tax cuts and increased infrastructure spending, which often leads to a rise in inflation expectations and a stronger economy overall.
T: How does this expectation influence the Federal Reserve’s potential actions?
E: When the market anticipates higher inflation due to robust fiscal policies, it pushes expectations that the Federal Reserve might raise interest rates more aggressively to combat that inflation. Investors are betting that as the economy heats up, the Fed will tighten monetary policy more than previously planned.
T: Interesting. So, are we looking at a shift in the Fed’s approach?
E: Undoubtedly. The Fed is facing a delicate balance. On one hand, they want to support the economic recovery post-pandemic, but on the other, if inflation expectations soar, they may have no choice but to increase rates sooner than anticipated.
T: What about the stock market itself? How do these bets on Fed actions impact investing strategies?
E: Typically, as interest rates rise, the cost of borrowing increases, which can dampen corporate profits. Thus, sectors like technology that rely heavily on borrowing might see more volatility. Investors might start rotating their portfolios into sectors that tend to perform better in a rising interest rate environment, such as financials and consumer staples.
T: That sounds like it could lead to some significant shifts in market dynamics. What advice would you give investors navigating this uncertainty?
E: My advice would be to stay informed and adaptable. Keeping an eye on economic indicators, such as inflation rates and employment data, can provide valuable insights. Diversification is also key; having a balanced portfolio can help mitigate risks associated with sudden market changes.
T: With so many variables at play, it’s crucial to stay engaged. Do you think the overall sentiment towards Trump’s presidency in financial markets will hold steady, or could we see dramatic shifts?
E: Sentiment can be quite fickle. While there’s currently optimism, it hinges on the administration successfully implementing its policies. Challenges, both domestically and internationally, could quickly alter this outlook. Investor sentiment often reacts to news headlines, so volatility is to be expected.
T: Thank you, Dr. Grant, for shedding light on this complex topic. As we navigate the financial implications of Trump’s presidency, your insights are invaluable.
E: It’s my pleasure! I look forward to seeing how these developments unfold.
T: And thank you to our audience for tuning in. Make sure to follow us for more in-depth discussions and analyses on current events shaping our world.