Federal safety net is set to cut rates again while facing a hazy post-election outlook

WASHINGTON — No one knows how Tuesday’s presidential election will turn out, but the Federal safety net’s shift two days later is much easier to forecast: With worth rise continuing to chilly, the Fed is set to cut profit rates for a second period this year.

The presidential contest might still be unresolved when the Fed ends its two-day conference Thursday afternoon, yet that uncertainty would have no result on its selection to further reduce its point of reference rate. The Fed’s upcoming actions, though, will become more unsettled once a recent president and Congress receive office in January, particularly if Donald Trump were to triumph the White House again.

Trump’s proposals to impose high tariffs on all imports and launch mass deportations of unauthorized immigrants and his threat to intrude on the Fed’s normally independent rate decisions could send worth rise surging, economists have said. Higher worth rise would, in turn, compel the Fed to leisurely or stop its rate cuts.

On Thursday, the Fed’s policymakers, led by Chair Jerome Powell, are on track to cut their point of reference rate by a quarter-point, to about 4.6%, after having implemented a half-point reduction in September. Economists expect another quarter-point rate cut in December and possibly additional such moves next year. Over period, rate cuts tend to lower the costs of borrowing for consumers and businesses.

The Fed is reducing its rate for a different rationale than it usually does: It often cuts rates to boost a sluggish economy and a frail job economy by encouraging more borrowing and spending. But the economy is growing briskly, and the unemployment rate is a low 4.1%, the government reported Friday, even with hurricanes and a strike at Boeing having sharply depressed net job growth last month.

Instead, the central lender is lowering rates as part of what Powell has called “a recalibration” to a lower-worth rise surroundings. When worth rise spiked to a four-decade high of 9.1% in June 2022, the Fed proceeded to raise rates 11 times — ultimately sending its key rate to about 5.3%, also the highest in four decades.

But in September, year-over-year worth rise dropped to 2.4%, barely above the Fed’s 2% target and equal to its level in 2018. With worth rise having fallen so far, Powell and other Fed officials have said they ponder high borrowing rates are no longer essential. High borrowing rates typically restrict growth, particularly in profit-rate-sensitive sectors such as housing and auto sales.

“The restriction was in place because worth rise was elevated,” said Claudia Sahm, chief economist at recent Century Advisors and a former Fed economist. “worth rise is no longer elevated. The rationale for the restriction is gone.”

Fed officials have suggested that their rate cuts would be gradual. But nearly all of them have expressed back for some further reductions.

“For me, the central question is how much and how quick to reduce the target for the (Fed’s key) rate, which I depend is currently set at a restrictive level,” Christopher Waller, an influential member of the Fed’s Board of Directors, said in a talk last month.

Jonathan Pingle, an economist at Swiss lender UBS, said that Waller’s phrasing reflected “unusual confidence and conviction that rates were headed lower.”

Next year, the Fed will likely commence to wrestle with the question of just how low their point of reference rate should leave. Eventually, they may desire to set it at a level that neither restricts nor stimulates growth — “neutral” in Fed parlance.

Powell and other Fed officials acknowledge that they don’t recognize exactly where the neutral rate is. In September, the Fed’s rate-setting committee estimated that it was 2.9%. Most economists ponder it’s closer to 3% to 3.5%.

The Fed chair said the officials have to assess where neutral is by how the economy responds to rate cuts. For now, most officials are confident that at 4.9%, the Fed’s current rate is far above neutral.

Some economists debate, though, that with the economy looking well even with high borrowing rates, the Fed doesn’t require to ease loan much, if at all. The concept is that they may already be close to the level of profit rates that neither slows nor stimulates the economy.

“If the unemployment rate stays in the low 4’s and the economy is still going to develop at 3%, does it matter that the (Fed’s) rate is 4.75% to 5%?” said Joe LaVorgna, chief economist at SMBC Nikko financial instruments, asked. “Why are they cutting now?”

With the Fed’s latest conference coming correct after Election Day, Powell will likely field questions at his information conference Thursday about the outcome of the presidential race and how it might affect the economy and worth rise. He can be expected to reiterate that the Fed’s decisions aren’t affected by politics at all.

During Trump’s presidency, he imposed tariffs on washing machines, solar panels, steel and a range of goods from China, which President Joe Biden maintained. Though studies display that washing machine prices rose as a outcome, overall worth rise did not rise much.

But Trump is now proposing significantly broader tariffs — essentially, import taxes — that would raise the prices of about 10 times as many goods from overseas.

Many mainstream economists are alarmed by Trump’s latest proposed tariffs, which they declare would almost certainly reignite worth rise. A update by the Peterson Institute for International Economics concluded that Trump’s main tariff proposals would make worth rise 2 percentage points higher next year than it otherwise would have been.

The Fed could be more likely to raise rates in response to tariffs this period, according to economists at Pantheon Macroeconomics, “given that Trump is threatening much bigger increases in tariffs.”

“Accordingly,” they wrote, “we will scale back the reduction in the funds rate in our 2025 forecasts if Trump wins.”