The Fed just cut rates again — and the timing is undeniably awkward

Steven Mnuchin appears on CNN on Thursday, November 7.

Steven Mnuchin, who served as Treasury Secretary for all four years of President-elect Donald Trump’s first term, said that Trump would be “very careful” not to reignite inflation with tariffs.

On the campaign trail, Trump said he planned to impose an across-the-board tariff of either 10% or 20% on every import coming to the US and a tariff of upward of 60% on Chinese imports. Economists have warned that tariffs, a tax on imports, would result in higher prices on everyday products for consumers.

But on CNN’s The Lead with Jake Tapper on Thursday, Mnuchin said that Trump was focused on inflation.

“I think President Trump clearly understands the impact of inflation, and I think he’s going to be very careful,” Mnuchin said of Trump’s tariff plans.

Mnuchin also said that in Trump’s first term, tariff exceptions were granted “on things that were going to have an impact on US companies.”

“But we did it very strategically,” Mnuchin added.

Mnuchin said that Trump’s priority upon returning to office will be to extend the 2017 Tax Cuts and Jobs Act. Parts of Trump’s signature tax cut legislation expire in 2025.

“I think he’ll add in some additional cuts that will be pro-growth,” Mnuchin said.

A screen at a trading post on the floor of the New York Stock Exchange displays the Federal Reserve interest rate decision, Thursday, Nov. 7, 2024.

All three major indexes ended the day higher on Thursday, extending their post-election rally.

But it wasn’t due to any massive moves: The Dow ended the day with a gain of just 0.2%, or 74 points — a dramatic difference to Wednesday’s surge of around 1,500 points.

The S&P closed 0.8% higher, marking its 49th record high of the year; and the Nasdaq Composite moved up by 1.5%.

Shoppers carry bags outside Macy's in New York on September 13.

Three-plus years of high inflation have weighed heavily on Americans, their finances and their outlooks on the economy.

And while that global inflation shock has certainly waned, and the rate of price hikes is close to normal, it hasn’t felt great to Americans, because those price levels aren’t going back down to where they were before.

So when will people start to feel relief?

“It takes some years of real wage gains for people to feel better,” Chair Jerome Powell said Thursday. “That’s what we’re trying to create. And I think we’re well on the road to creating that.”

Average hourly earnings gains have outpaced inflation for 17 months as of September, according to Bureau of Labor Statistics data.

Inflation has come down, the economy’s still strong and wages are moving up at a sustainable pace.

“But it will be some time before people regain their confidence and feel that,” he said.
“And we don’t tell people how to feel about the economy. We respect, completely respect what they’re feeling. Those feelings are true; they’re accurate. We don’t question them, we respect them.”

When asked if the Fed would consider undershooting on its 2% target to help people catch back up, Powell said that’s not in the cards.

“That’s not the way our framework works,” he said. “We do not think it would be appropriate to deliberately undershoot … low inflation can be a problem too.”

After issuing a terse “No” in response to a question about whether he would leave his post at the Federal Reserve before his term is up if President-elect Donald Trump asked him to leave, Fed Chair Jerome Powell later clarified that he believes Trump cannot fire him.

”Not permitted under the law,” Powell said.

However, the question may be moot. Although Trump has publicly quarreled with Powell in the past, Trump remains likely to allow the Fed chair to serve out the remainder of his term, which expires in May 2026, according to a senior adviser to Trump who requested anonymity to describe private conversations.

Trump at times during his first term took the unusual step of publicly griping about the Fed’s policy. But Powell wouldn’t comment on Thursday on questions about whether he was concerned Trump in his second term could go further to undermine the Fed’s independence.

“I’m not going to get into any of the political things here today. But thank you,” Powell said, politely.

Customers shop in the deli meat aisle of a grocery store on October 17 in Miami, Florida.

The recent batch of economic data has Federal Reserve officials “feeling good” about economic activity, but Chair Jerome Powell isn’t close to taking a victory lap.

Inflation has cooled substantially from its highs of two years ago, and pressures behind the price hikes are largely reflective of “catch-up” issues: leases turning over, catching up to market-rate rents; insurance renewals catching up to higher prices; and auto-related costs.

Plus, the cooling labor market is not a source of inflation, he added.

But, he noted: “The job’s not done on inflation.”

“So we’re not declaring victory, but we feel like the story is very consistent within inflation continuing to come down on a bumpy path over the next couple of years and settling around 2%,” he said. “That story is intact.”

However, he cautioned that risks are still present and reiterated the importance of the Fed finding the right pace for loosening monetary policy.

If the Fed moves too quickly, there are risks inflation could reaccelerate. If it moves too slow, there are risks of the labor market weakening significantly, he said.

The major indexes moved slightly higher Thursday afternoon after the Federal Reserve said it would be cutting rates by a quarter point.

The Dow gained 0.1%, the S&P 500 moved up by 0.8% and the Nasdaq Composite was up 1.5% as Fed Chair Jerome Powell gave his post-meeting press conference.

Treasury yields fell Thursday, after surging Wednesday when the presidential election was decided.

Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington today.

Would Federal Reserve Chair Jerome Powell resign if asked to do so by President-elect Donald Trump, with whom he clashed several times during his first term?

“No,” Powell said, without hesitation, in response to a reporter’s question at Thursday’s post-meeting press conference.

Trump has previously asserted he has the right to fire Powell, but Powell staunchly disagrees. “Not permitted under the law,” Powell said Thursday. That’s because once Fed officials are confirmed, they’re only able to be removed from the position if they are found to have violated the law.

Federal Reserve Board Chairman Jerome Powell departs after speaking during a news conference at the Federal Reserve in Washington, on Thursday, November 7.

The next four years under President-elect Donald Trump are poised to look vastly different than the last couple of years under President Joe Biden.

For instance, a Trump administration could come with sweeping tariffs, mass deportations of immigrants and more tax cuts. These policies, and others he campaigned on, could significantly alter the economic outlook to the extent that continuing to cut rates may no longer be optimal.

For now, “the election will have no effects on our policy decisions,” Fed Chair Jerome Powell told reporters on Thursday. “We don’t know what the timing and substance of any policy changes will be. We therefore don’t know what the effects on the economy would be.”

That’s why Powell said that “there’s nothing to model right now” in terms of how Trump’s policies could impact the economy. Once officials have more clarity on whether his proposals will go into effect they’ll update their models, he said.

The elephant in the room at the Fed today is President-elect Donald Trump, and what his economic proposals mean for the economy. By most accounts, Trump’s blanket tariff proposals and aggressive tax cuts translate to more inflation just as the Fed is taking its victory lap.

That could ultimately spell the end of the central bank’s rate-cutting, at least for a while.

“What we’ve seen is possibly the last rate cut, as tariffs and government bring back the looming risk of inflation,” Giuseppe Sette, president of Reflexivity, wrote Thursday.

Notably, the Fed dropped the phrase “gained greater confidence” in its description of inflation moving toward the bank’s 2% target, said Ryan Sweet, chief US economist at Oxford Economics.

“This tweak to the statement is likely a subtle acknowledgment of the heightened uncertainty in the outlook because of the election, without explicitly saying it,” Sweet said in note.

To be clear, Fed Chair Jerome Powell is not saying anything about the last rate cut.

“As a general matter, as we move ahead, we are prepared to adjust our assessments of the appropriate pace and destination as the outlook evolves,” the Fed head said at his press conference Thursday.

A for sale sign hangs in front of a townhouse in the Park Slope neighborhood in the borough of Brooklyn in New York on October 10.

As the Fed cuts rates, you’d think mortgage rates would fall, too. But, nope: Mortgage rates fell in anticipation of the Fed cutting rates, but they’ve been creeping higher for six straight weeks, and a 30-year mortgage will now land you a rate of nearly 6.8%.

That’s because US Treasury bonds keep falling. Consumer loan rates like mortgages are more closely tied to the 10-year US Treasury yield, which has been steadily rising as bond prices sink. And yields have been rising as the US economy outperforms the rest of the world, making America’s debt more attractive, and they’ve risen in anticipation of President-elect Donald Trump’s reelection, because he has proposed economic policies that could send inflation higher.

The Fed has said the housing market remains stuck and is source of persistent inflation. So why not cut rates even more to try to influence bond yields lower?

Fed Chair Jerome Powell said Thursday that the Fed isn’t convinced the bond market will remain weak for long. He said it may be a momentary blip because of policy decisions outside the Fed’s control.

“We do take financial conditions into account. If they’re persistent and if they’re material, then we’ll certainly take them into account in our policy. But I would say we’re not at that stage right now,” Powell said.

The US flag flies over the Federal Reserve in Washington on October 3.

If Federal Reserve officials stick to the forecasts they submitted at September’s monetary policy meeting, we could see one more quarter-point cut at next month’s meeting and another four quarter-point cuts in 2025.

Their forecasts are subject to change, based on how the economy evolves. For instance, if officials become more worried about inflation heating up, they may opt to hold off on cutting rates further.

Already, traders anticipate there will be closer to two cuts next year, according to Fed funds futures. That may be a reflection of traders’ belief that President-elect Donald Trump’s policies, which could include sweeping tariffs, may reignite inflation.

“Every meeting we’re going to be looking at the incoming data and how that affects the outlook,” Fed Chair Jerome Powell told reporters in a post-meeting press conference Thursday. He declined to comment on whether officials’ forecasts have changed since the September meeting.

At every other monetary policy meeting, Federal Reserve officials are required to submit forecasts on the economic outlook for the remainder of the current year as well as for the subsequent three years and longer run.

Their forecasts are included in the Summary of Economic Projections, which colloquially is referred to as the “dot plot,” signifying each official’s views displayed simply as a dot.

Officials last submitted projections at September’s meeting. Here’s how they believe the economy will evolve, based on the median forecast:

Federal Reserve officials’ decision to cut interest rates by a quarter point was unanimous, unlike September’s meeting where Fed Governor Michelle Bowman went against the tide, voting for a quarter-point cut versus the half-point cut all 11 other officials voted for.

That marked the first time in over two years a Fed official dissented from the majority decision. Bowman later explained she favored the smaller cut at September’s meeting because she was concerned the larger cut could “unnecessarily” stoke demand, potentially ushering in more inflation, she said in a statement.

A customer walks by a display of fresh eggs at a grocery store on September 25 in San Anselmo, California.

Economic figures show the Federal Reserve currently has to watch both inflation and the job market. Officials stated in their latest policy statement Thursday that the risk of the job market deteriorating and the risk of inflation reaccelerating are roughly the same magnitude now.

But in recent months, attention has shifted more toward the health of America’s labor market, which remains in decent shape, but has clearly lost momentum over the past year.

Employers had a seasonally adjusted 7.4 million job openings in September, according to Labor Department data, down considerably from 9.3 million in the same month a year earlier, while the rate of hiring fell to 3.5% from 3.7% during the same period.

The unemployment rate stood at 4.1% in October, up from 3.8% a year earlier (though still at a historically low level.) Worker filings for ongoing unemployment benefits rose last week to the highest level since November 2021, an indication that it has become harder for unemployed Americans to find a job. Fed officials wrote in their statement that “since earlier in the year, labor market conditions have generally eased.”

Overall, the November statement from the Federal Reserve included a “subtle shift in tone” that suggests the Fed “may have lost some confidence in the disinflationary path,” wrote Seema Shah, chief global strategist at Principal Asset Management, in a note issued after the Fed decision.

That’s “a dynamic that the US election result is likely to exacerbate,” she wrote.

US Federal Reserve chairman Jerome Powell in Washington, DC, on September 18.

The Federal Reserve cut interest rates by a quarter point Thursday on the heels of the US presidential election earlier this week.

It’s the second rate cut since the central bank began to lower borrowing costs in September, though the latest cut is smaller. Still, it provides Americans further relief from the high cost of loans like credit cards and autos.

Slower inflation and a cooling job market paved the way for Thursday’s decision.

Federal Reserve officials likely aren’t going to say how they think President-elect Donald Trump’s second term will impact the economy. In fact, the Fed prides itself on avoiding even the suggestion that it is wading into politics.

At the same time, the policies elected officials enact undeniably have an impact on the economy, and as Fed officials cast votes on where they believe interest rates should be to fulfill their mandate for stable prices and maximum employment, they have to consider the effect of fiscal policy.

As such, at the Fed’s monetary policy meeting that took place after Trump was elected for his first term, officials asked Fed researchers who advise central bankers to spell out how they believe policies Trump campaigned, such as tax cuts and tariffs, could impact the economy. That’s according to a transcript of the December 2016 monetary policy meeting. Some researchers told officials they were already starting to incorporate the potential effects of Trump’s campaign initiatives into their economic models.

At that meeting, some officials even expressed concerns with Trump’s agenda, according to the December 2016 meeting transcript. (Transcripts are made available to the public at a roughly five-year lag.)

Loretta Mester, then-president of the Cleveland Fed, said: “Policies that constrain immigration and trade would have negative effects for the US economy over the medium and longer run, but I have not incorporated these into my projections at this point.

Read more here.

Donald Trump during election night watch party at the Palm Beach Convention Center, on November 6 in West Palm Beach, Fla.

President-elect Donald Trump felt vindicated by the decisive election victory that cemented his return to power. But he felt downright ecstatic by the fact that the stock market notched new record highs after the outcome, according to two sources who have spoken with Trump.

“I know that he was euphoric over that,” said one of these sources. “It’s kind of like a stock market referendum on the Trump agenda, right?”

The massive rally kicked off before the market opened Wednesday and continued through the morning and afternoon trading sessions. The Dow closed at a new record high after its best day since 2022. The S&P 500 and Nasdaq also reached new highs, with the S&P surging by 2.5% and the tech-heavy index closing 2.95% higher. The US dollar had its best day in two years and Treasury yields also rose.

The rally, though, may not be a reflection of investors’ celebrating Trump’s victory, but rather that the election was decided relatively quickly. The election — and the widely held belief that Trump and his allies could contest the result in courts — has served as a cloud over the US economy and stock market in recent months.

During his last term, Trump often mused that the stock market was a more telling bellwether of his performance in office than voters’ approval ratings in official polls. He frequently sought to jawbone the market — by teasing investor-friendly trade deals, tax cuts and personnel moves — especially during critical political periods, like the run-up to midterms and his 2020 reelection. When his Cabinet officials appeared on television to talk up his policies, they frequently did so with the goal of moving the market to make the boss happy.

This time around, investors have harbored reservations about Trump’s pursuit of steep tariffs, which could impact growth and inflation. They’ve also worried about the impact of higher taxes on corporations and individuals that Vice President Kamala Harris had proposed.

The market reaction, Trump believes, was a sigh of relief she didn’t win. And long-sought vindication for him.

Inflation is likely to rise in the United States and around the world if newly elected US President Donald Trump follows through on his campaign promises to cut taxes, crack down on immigration and hike tariffs on all imported goods.

Together with a Republican majority in the US Senate, Trump’s reelection puts the former president in a strong position to implement his potentially radical economic agenda.

Trump’s proposed economic policies — including deporting immigrants, across-the-board tariffs and increased political influence on the Fed — would, if fully implemented, “likely lead to a substantial decrease” in US economic output and “a large increase in inflation,” said Antonio Fatás, an economics professor at INSEAD business school headquartered in France.

Susannah Streeter, head of money and markets at investment platform Hargreaves Lansdown, echoed some of these views. A stronger dollar reflects expectations that Trump will cut taxes, hike tariffs and clamp down on immigration, which are all inflationary and likely to mean more elevated interest rates in the years to come, she wrote in a note Wednesday.

“Investors are bracing for tariffs… which will push up the price of imported goods for American shoppers,” she added. Trump’s “vow to kick out immigrants with waves of deportations could also have economic ramifications, potentially pushing up wage bills for companies.”

Read more here.

Federal Reserve Chairman Jerome Powell speaks during a news conference following the September meeting of the Federal Open Market Committee at the William McChesney Martin Jr. Federal Reserve Board Building on September 18.

Fed officials stress that their decisions are dependent on economic data, firm indications of the economy’s health and possible direction. But there’s one key concept guiding the Fed that Chair Jerome Powell says is “theoretical” and “can’t be directly observed.”

That’s the so-called “neutral rate of interest,” a level of interest rates that neither stimulates nor dampens the economy. The Fed’s main tool is its key interest rate, which influences borrowing costs across the economy, and it functions by either boosting demand, if rates are low, or by cooling it, if rates are elevated. That depends on whether the Fed is dealing with high inflation, which prompts the Fed to slow the economy, or high unemployment, which forces the Fed to do the opposite.

Economists describe the neutral rate of interest as theoretical because it depends on many, many factors that render it too imprecise — such as population growth, productivity, savings behavior, any structural changes in the economy and so on, in addition to the effects of borrowing costs.

With inflation down substantially from a four-decade peak reached in 2022, and just a whisper away from the Fed’s 2% goal, the Fed has shifted more attention to America’s job market, which has steadily weakened over the past few years. It remains in good shape, but Powell telegraphed in September that the Fed is committed to maintaining its strength, avoiding any deterioration.

Fed officials have said they think borrowing costs are still at restrictively high levels, which puts the labor market at risk. Now it’s a matter of how fast the Fed wants interest rates to go back to that neutral rate of interest. That, of course, also depends on inflation. Some officials have said they feel no urgency to pare back rates.

“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.”