What are the odds of the Fed staying pat and not reducing interest rates?
Attention will now shift to Thursday’s FOMC decision where a 25bps rate cut is widely expected. So, the surprise would be no change by the Fed, which cannot be ruled out following the resounding win by President-elect Trump.
What would you do if in the Fed’s shoes?
It is premature to say what the next administration’s economic policy agenda will look like. All we have to go by is by the election platform of higher tariffs, lower taxes and increase spending. Assuming the Republicans maintain control of the House, there are no obstacles to passing whatever economic agenda is proposed. Markets are assuming the most extreme case with the initial reaction being the so call Trump Trade.
On one hand, given the relative strength of the economy, prospects of higher deficits, and a risk of higher inflation resulting from tariffs, which has already spooked the bond market, a case could be made for the Fed to hold off on a rate cut. In fact, I read one major bank calling for no change in rates.
US 10 Year Bond Yield
Investing.com
On the other hand, the FOMC could just follow the current data, cut rates and then leave the future course of monetary policy open and data dependent. This would be the more logical approach as anticipating the new administration’s economic policy agenda and factoring that into the Fed’ rate decision would seem premature.
So, if I was in the Fed’ shoes I would cut rates and then take a wait-and-see approach for what comes next.
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