America now looks to the Fed for clues on future rate cuts

Washington (CNN) — The Federal Reserve is expected to announce Thursday it is cutting interest rates, a decision that comes just two days after a divisive and historic US presidential election.

The central bank is widely expected to move its benchmark interest rate lower by a quarter point at the conclusion of its two-day policy meeting. The move comes as inflation remains on a downward trend while the job market continues to lose momentum.

Investors will be listening closely Thursday afternoon to comments from Fed Chair Jerome Powell at his traditional post-meeting press conference for any clues on the pace of future rate cuts, given the policies touted by President-elect Donald Trump, who will return to the White House for a second term.

Recent data shows the US economy remains on solid footing, but the Fed is nonetheless paring back rates because borrowing costs remain at restrictively high levels, according to Fed officials. While that has helped rein in price pressures, it also puts the job market in jeopardy.

Officials lowered rates in September for the first time in more than four years, opting for a large half-point cut instead of the more traditional quarter-point size. Powell said the bold move in September was a sign of the central bank’s commitment to maintaining the labor market’s strength.

With the rate-cutting cycle now in full swing, the Fed is bringing rates on a journey back to the so-called neutral rate of interest — a level of rates that neither stimulates nor dampens the economy, since it seems like America’s economy is in a rare sweet spot where inflation is at bay, with the job market on solid ground. Such a scenario is known as a soft landing, and now the Fed’s job is to maintain that status.

But, despite September’s big rate cut, some officials have said there isn’t any haste to cut rates further.

“I’m not in a rush to get to neutral,” Atlanta Fed President Raphael Bostic said last month at an event in Jackson, Mississippi. “We must get inflation back to our 2% target, and I don’t want us to get to a place where inflation stalls out because we haven’t been restrictive for long enough. So I’m going to be patient.”

Still, rate cuts are expected to stretch through 2025, even during a Trump presidency, according to economists.

Powell, whose term ends in 2026, will likely be peppered with questions from reporters Thursday on what a second Trump term would mean for the Fed’s thinking on future rate cuts — and its independence as an institution. He will likely not answer those questions directly, economists say.

A paradox of weaker hiring and strong spending

Fed officials are making sense of mixed signals about the US economy and its direction.

On one hand, there’s evidence that America’s job market has continued to lose momentum in recent months. Job openings, a proxy for labor demand, fell in September back to pre-pandemic levels as the rate of hiring continued to hover at levels not seen since 2014, excluding the steep drop in the beginning of the Covid-19 pandemic. The October jobs report was difficult to interpret because figures were skewed by the temporary effects of recent hurricanes and labor strikes, but it came below expectations, which factored in those disruptions.

On the other hand, Americans have continued to open their wallets, fueling strong economic growth. The US economy expanded at a healthy 2.8% annualized rate in the third quarter, driven by strong consumer spending, which makes up 70% of economic output. Businesses also continued to invest in the July-through-September period, according to government data, and the stock market’s epic rally has proven resilient. Major stock indexes reached record highs Wednesday after news of Trump defeating Vice President Kamala Harris.

“The data has given a little bit for everyone,” said Felipe Villarroel, portfolio manager at TwentyFour Asset Management. “But the economy overall is doing well. The labor market just seems to be cooling off at the margins.”

But the one thing that’s clear is that inflation has continued to ease — now just a hair away from the Fed’s 2% target. The Fed aims to keep inflation at that level “on a sustainable basis,” meaning inflation has to hover closely around 2% for an extended period.

The Fed will have to manage Trump and his policies

Trump’s election comes with massive implications for the US economy in the coming years — and possibly for the Fed itself.

The former president backs tax cuts, stiff across-the-board tariffs, mass deportations and deregulation, but he hasn’t provided many details on how he plans to carry out those plans. Trump’s agenda has been described as inflationary by many economists, CNN previously reported.

The Fed takes into account how the laws and policies enacted by the White House and Capitol Hill affect the US economy. It’s not clear exactly when the Fed will start baking Trump’s proposed policies in to their economic projections. Officials also frequently mention that their decisions on interest rates are guided by economic data.

But since Trump’s economic vision could eventually stoke inflation, that could mean the Fed delivers fewer rate cuts in the coming years.

Another major question for the Fed in a second Trump term is on its decision-making independence, widely regarded by economists and investors as a successful feature of the institution. The Wall Street Journal has reported that Trump could push for the sitting US president to have a say in the Fed’s decision-making.

When Arthur Burns served as Fed chair in the 1970s, his policy decisions were heavily influenced by then-President Richard Nixon, who pressed the Fed to stimulate the economy even when it was apparent that price pressures were brewing. That capitulation to the sitting president’s wishes, and disregard to economic data, entrenched a painful era of high inflation that lasted from 1965 to 1982, known as “the Great Inflation,” former Fed chair Ben Bernanke wrote in a 2022 book about monetary policy.

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