The Federal Reserve cut interest rates by a quarter of a percent on Wednesday, signaling that it will be more cautious in its policy decisions due to the looming uncertainty surrounding President-elect Donald Trump’s expansionist monetary policies. The decision is seen as a response to Trump’s promises of high tariffs and tax cuts, which could lead to inflationary pressures.
The Fed cut its key interest rate by 25 basis points, sending the federal funds rate to 4.25% to 4.5%. This marks the third time the Fed has reduced rates in 2024, and it is now predicting half as many rate cuts for next year compared to what was initially forecast.
Economists say that Trump’s policies could be inflationary and tighten the labor market, which would run counter to the Fed’s goal of keeping inflation around 2%. Julia Coronado, a former Fed economist, stated that “pretty much every prong of [Trump’s] policy looks like it’s going to threaten their mandate.”
The Fed’s decision is also seen as a way for the bank to position itself ahead of an administration with question marks over its fiscal policies. Goldman Sachs warned last month that Trump’s proposed tariffs on imports from China, Canada, and Mexico would increase inflation by nearly 1%.
However, it remains to be seen how aggressive Trump will be on day one, which could impact the Fed’s decision-making. Francesco Bianchi, a macroeconomics professor, stated that “it will be very hard for the Fed to justify interest rate cuts unless it sees some signs that the economy is really struggling.”
The relationship between Trump and Powell, the outgoing Fed chair, has been complicated in the past, with Trump appointing Powell but also frequently criticizing him on Twitter. This dynamic could provide another variable in the Fed’s decision-making process.
Source: https://fortune.com/2024/12/20/why-are-stocks-down-federal-reserve-interest-rate-cut-donald-trump-policy