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Federal Reserve Cuts Rates Again as Trump Era Begins Anew

In a widely expected decision, the US Federal Reserve has once again lowered its benchmark interest rate, cutting a quarter point to bring the federal funds rate to a range of 4.5% to 4.75%. The move marks the second consecutive rate reduction since the Fed began easing monetary policy in September, following a relentless campaign of hikes that saw rates reach a 20-year high.

The rate cut comes as inflation shows signs of finally cooling after a prolonged surge, with the Fed’s preferred inflation gauge, the personal consumption expenditure (PCE) price index, dipping to 2.1% in the latest reading – tantalizingly close to the central bank’s 2% target. Meanwhile, the more widely followed consumer price index (CPI) slowed to 2.4% in September, its lowest level in three years.

Balancing Act as Trump Term Looms

But even as inflation moderates, the Federal Reserve faces a delicate balancing act as it navigates economic crosscurrents and a shifting political landscape. The central bank’s rate-setting Federal Open Market Committee (FOMC) nodded to the progress on inflation in its statement announcing the latest move, while cautioning that price pressures “remain somewhat elevated.”

Complicating matters is the looming specter of a second term for President Donald Trump, who secured re-election earlier this week in a hard-fought campaign that saw pocketbook issues like inflation emerge as a decisive factor. On the stump, Trump and his allies repeatedly hammered Democrats over rising prices, forcing the opposition to play defense on an issue that cut deeply with voters still reeling from a once-in-a-generation bout of inflation.

The Trump Effect

Now, with Trump set to remain in the White House for another four years, questions are swirling over how the Fed will navigate an increasingly treacherous political minefield. The central bank has long guarded its independence as a core tenet, insulating monetary policy from the whims of elected officials in order to make the difficult decisions needed to achieve its dual mandate of price stability and maximum employment.

But that autonomy has come under increasing strain in the Trump era, with the president repeatedly taking to Twitter to bash the Fed and demand lower rates. In the lead-up to the election, Trump suggested he would seek to exercise greater control over Fed decision-making in a second term, declaring that “the president should have at least a say in there.”

“I made a lot of money. I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve – or the chairman.”

President Donald Trump, August 2024

While Trump has said he will allow Fed Chair Jerome Powell to serve out his current term through May 2026, the president’s past broadsides against Powell and the Fed have raised concerns over central bank independence. In his previous term, Trump derided Fed officials as “boneheads” and attacked Powell as having “No ‘guts,’ no sense, no vision! A terrible communicator!”

The Path Ahead

As the dust settles from a contentious election and a new presidential term takes shape, the path forward for the Federal Reserve remains uncertain. With inflation cooling but not yet fully tamed, and the economy continuing to flash warning signs, the central bank faces an unenviable needle to thread as it seeks to engineer a soft landing.

For now, markets are pricing in the potential for further rate cuts in the months ahead, with traders betting that the Fed will need to continue easing policy into 2025 to prop up a wobbly economy. But much will depend on the trajectory of inflation and the broader economic picture, as well as the looming prospect of a Trump presidency unshackled from the constraints of imminent electoral impact.

As one senior Fed official remarked in the wake of the FOMC decision, “We’ve got our work cut out for us. The data is telling us one thing, but the political tea leaves are another matter entirely. It’s going to be a high wire act.”

Only one thing seems certain: for the Federal Reserve, navigating the uncharted waters of the next four years will require every ounce of skill, foresight and independence it can muster. The stakes, for the economy and the American people, couldn’t be higher.

For now, markets are pricing in the potential for further rate cuts in the months ahead, with traders betting that the Fed will need to continue easing policy into 2025 to prop up a wobbly economy. But much will depend on the trajectory of inflation and the broader economic picture, as well as the looming prospect of a Trump presidency unshackled from the constraints of imminent electoral impact.

As one senior Fed official remarked in the wake of the FOMC decision, “We’ve got our work cut out for us. The data is telling us one thing, but the political tea leaves are another matter entirely. It’s going to be a high wire act.”

Only one thing seems certain: for the Federal Reserve, navigating the uncharted waters of the next four years will require every ounce of skill, foresight and independence it can muster. The stakes, for the economy and the American people, couldn’t be higher.