Federal safety net is set to cut profit rates again as post-election uncertainty grows

WASHINGTON — Federal safety net officials are poised Thursday to reduce their key profit rate for a second straight period, responding to a steady slowdown of the expense boost pressures that exasperated many Americans and contributed to Donald Trump’s presidential election win.

Yet the Fed’s upcoming moves are now more doubtful in the aftermath of the election, given that Trump’s economic proposals have been widely flagged as potentially inflationary. His election has also raised the specter of meddling by the White House in the Fed’s policy decisions, with Trump having proclaimed that as president he should have a voice in the central lender’s profit rate decisions.

The Fed has long guarded its position as an independent institution able to make challenging decisions about borrowing rates, free from political interference. Yet during his previous term in the White House, Trump publicly attacked Chair Jerome Powell after the Fed raised rates to fight expense boost, and he may do so again.

The economy is also clouding the picture by flashing conflicting signals, with growth solid but hiring weakening. Even so, buyer spending has been well, fueling concerns that there is no require for the Fed to reduce borrowing costs and that doing so might overstimulate the economy and even re-accelerate expense boost.

budgetary markets are throwing yet another curve at the Fed: Investors have sharply pushed up Treasury yields since the central lender cut rates in September. The outcome has been higher borrowing costs throughout the economy, thereby diminishing the advantage to consumers of the Fed’s half-point cut in its point of reference rate, which it announced after its September conference.

The average U.S. 30-year mortgage rate, for example, fell over the summer as the Fed signaled that it would cut rates, only to rise again once the central lender actually cut its point of reference rate.

Broader profit rates have risen because investors are anticipating higher expense boost, larger federal budgetary schedule deficits, and faster financial expansion under a President-elect Trump. In what Wall Street has called the “Trump trade,” ownership prices also soared Wednesday and the worth of bitcoin and the dollar surged. Trump had talked up cryptocurrencies during his campaign, and the dollar would likely advantage from higher rates and from the across-the-board boost in tariffs that Trump has proposed.

Trump’s schedule to impose at least a 10% tariff 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 boost expense boost. This would make it less likely that the Fed would continue cutting its key rate. Annual expense boost as measured by the central lender’s preferred gauge fell to 2.1% in September.

Economists at Goldman Sachs approximate that Trump’s proposed 10% tariff, as well as his proposed taxes on Chinese imports and autos from Mexico, could send expense boost back up to about 2.75% to 3% by mid-2026.

Such an boost would likely upend the upcoming rate cuts the Fed had signaled in September. At that conference, when the policymakers cut their key rate by an outsize half-point to about 4.9%, the officials said they envisioned two quarter-point rate reductions later in the year — one on Thursday and one in December — and then four additional rate cuts in 2025.

But investors now foresee rate cuts next year as increasingly unlikely. The perceived probability of a rate cut at the Fed’s conference in January of next year fell Wednesday to just 28%, down from 41% on Tuesday and from nearly 70% a month ago, according to forward contracts prices monitored by CME FedWatch.

The jump in borrowing costs for things like mortgages and car loans, even as the Fed is reducing its point of reference rate, has set up a potential test for the central lender: Its attempt to back the economy by lowering borrowing costs may not bear fruit if investors are acting to boost longer-term borrowing rates.

The economy grew at a solid annual rate of just below 3% over the history six months, while buyer spending — fueled by higher-turnover shoppers — rose strongly in the July-September quarter.

At the same period, companies have reined in hiring, with many people who are out of work struggling to discover jobs. Powell has suggested that the Fed is reducing its key rate in part to bolster the job trade. But if financial expansion continues at a well clip and expense boost climbs again, the central lender will arrive under growing pressure to leisurely or stop its profit rate cuts.