Traders are now pricing in a 45% chance that the Federal Reserve will pause its rate cuts in December, up from just 17% last week. This shift in expectations comes as markets assess the implications of Donald Trump’s recent political victory, which could complicate the Fed’s future policy decisions.
The Federal Reserve has already implemented two consecutive rate cuts this year, but the growing likelihood of a pause reflects both the political climate and cautious signals from Fed officials. In recent remarks, some Fed members have advocated for a more measured approach to further easing, emphasizing the need to carefully assess economic conditions before taking additional action.
Economists suggest that the Fed’s decision in December may depend on how it anticipates the effects of Trump’s policy agenda, which includes aggressive tariffs and stricter immigration policies—factors that could put upward pressure on inflation. Some, like economist Joseph Stiglitz, have argued that these expansionary policies could eventually push the Fed to raise interest rates again, while others, including JPMorgan’s David Kelly, believe they could lead to a pause in December.
Despite the potential influence of political factors, Fed Chair Jerome Powell has maintained that the central bank operates independently and does not factor politics into its decisions. In his last press conference, Powell declined to comment on election-related topics, stating only that he would not resign if asked by Trump.
However, JPMorgan’s Kelly noted that while the Fed remains independent, it still reacts to economic trends shaped by government policies. “They won’t dictate to the government, but they will respond to the economic direction the government is heading toward,” Kelly explained.
This cautious stance is reflected in comments from Fed officials this week. Federal Reserve Governor Michelle Bowman, who dissented against the 50 basis point rate cut in September, called for a careful approach to further rate reductions. Speaking in Florida, she emphasized that inflation remains a key concern, noting that while there had been progress in lowering inflation, the momentum had stalled in recent months.
Similarly, Governor Lisa Cook highlighted that the pace and extent of rate cuts would depend on economic data, suggesting that the Fed should aim for a more neutral policy stance in the future.
Chair Powell also reaffirmed the Fed’s cautious approach last week, stating that the economy is not signaling an urgent need for further rate cuts. “The strength we are currently seeing in the economy gives us the ability to approach our decisions carefully,” he said.
The Fed’s next decision on interest rates will be announced at the conclusion of its meeting on December 18.
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