WASHINGTON (AP) — Federal Reserve officials are poised Thursday to cut their key interest rate for a second straight time, responding to a steady slowdown in inflation pressures that has irritated many Americans and helped fuel Donald Trump’s victory in the presidential elections.
Yet the Fed’s future moves are now more uncertain in the aftermath of the election, as Trump’s economic proposals have been widely labeled as potentially inflationary. His election has also raised the specter of White House interference in the Fed’s policy decisions, with Trump saying that as president he should have a say in the central bank’s interest rate decisions.
The Fed has long guarded its status as an independent institution capable of making tough decisions about interest rates, free from political interference. But during his previous term in the White House, Trump publicly attacked Chairman Jerome Powell after the Fed raised rates to fight inflation, and he may do so again.
The economy also clouds the picture by sending conflicting signals: growth is solid, but hiring is weakening. Still, consumer spending has been healthy, fueling concerns that the Fed does not need to cut borrowing costs and that this could overstimulate the economy and even accelerate inflation again.
Financial markets are once again throwing a curveball at the Fed: Investors have sharply pushed up government bond yields since the central bank cut rates in September. The result has been higher borrowing costs across the economy, reducing the benefit to consumers of the Fed’s half-point cut in interest rates that the Fed announced after its September meeting.
For example, the average U.S. 30-year mortgage rate fell over the summer when the Fed announced it would cut rates, only to rise again once the central bank actually lowered its benchmark rate.
Broader interest rates have risen as investors anticipate higher inflation, larger federal budget deficits and faster economic growth under a President-elect Trump. In what Wall Street has dubbed the “Trump trade,” stock prices also rose on Wednesday and the value of bitcoin and the dollar rose. Trump had talked about cryptocurrencies during his campaign, and the dollar would likely benefit from higher rates as well as the across-the-board rate increase Trump has proposed.
Trump’s plan to impose a tariff of at least 10% on all imports, as well as significantly higher taxes on Chinese goods, and to carry out a mass deportation of undocumented immigrants would almost certainly fuel inflation. This would make it less likely that the Fed would continue to cut its policy rate. Annual inflation, as measured by the benchmark used by the central bank, fell to 2.1% in September.
