She lowered it by a quarter point on Thursday – to the new range of 4.50 to 4.75 percent. It was the second step after the interest rate turnaround in September. It was now only half as big as it was back then.
Two days after the US presidential election, the Federal Reserve is keen to avoid additional uncertainty and not surprise the markets, said USA expert at KfW Research, Stephan Bales, about the widely expected interest rate move. Inflation has subsided, giving the monetary authorities around Fed Chairman Jerome Powell freedom of movement in terms of monetary policy.
Only 12,000 new jobs
Regarding the job market, the central bank said: Even if the unemployment rate remains low, labor market conditions have generally relaxed. Recently, signs of weakness in the labor market caused a stir: in October, only 12,000 new jobs outside of agriculture were added. Experts point out that the statistics were distorted by the consequences of Hurricane Milton and the strike at aircraft manufacturer Boeing.
Fed observer Joachim Schallmayer from DekaBank expects the US central bank to make a further cut of 25 basis points in December: “The door remains open for further interest rate cuts. However, the Fed will do so with a sense of proportion and without haste – depending on the situation “Examine the market condition and data situation.” However, the surprisingly large interest rate hike of 50 basis points with which the Fed initiated the monetary policy turnaround in September will remain the exception.
With Trump’s election victory, many investors are now assuming that the central bank will ultimately cut interest rates less than initially expected. During the election campaign, the Republican announced lower corporate taxes and higher tariffs, which should also have consequences for monetary policy. “If the Trump administration’s initial measures prove to drive inflation, the Fed will move forward more cautiously or even take a stand-by position,” says economist Bastian Hepperle from Hauck Aufhäuser Lamp Private Bank.
Trump called Fed Chairman Powell an “enemy”
Investors have recently been preparing for the interest rate cuts to end in the middle of next year and for the key monetary policy rate to land in a range of 3.75 to 4.00 percent. This could cause ignition. During his first presidency from 2017 to 2021, Trump openly called for low interest rates and even called Powell an “enemy” because, in his view, interest rate increases by the independent central bank were unnecessarily slowing growth. Trump promoted Powell to Fed chairman at the beginning of 2018. The now outgoing US President Joe Biden granted him a second term in office until May 2026, which Powell says he wants to complete.
Trump will likely keep Powell in the executive chair for the remainder of his term, CNN reported, citing an unnamed senior Trump adviser. Trump could still change his mind. However, he and his economic team currently believe that Powell should remain at the helm of the central bank until the end of his term in office.
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**Interview with Stephan Bales, USA Expert at KfW Research**
**Host:** Welcome, Stephan Bales, and thank you for joining us today. The Federal Reserve has recently announced a cut to interest rates, lowering them by a quarter of a percentage point. Can you explain the significance of this move in the context of the current economic landscape?
**Bales:** Thank you for having me. The recent decision by the Fed to cut interest rates to a range of 4.50 to 4.75 percent is significant, particularly just days after the presidential election. This move signals the Fed’s intent to provide some stability and predictability in the financial markets at a time when uncertainty can be heightened due to political events.
**Host:** Yes, the timing is certainly interesting. What factors influenced this decision, particularly concerning the job market?
**Bales:** The job market is a crucial factor here. Even though the unemployment rate remains relatively low, recently, we’ve seen signs of weakening in labor market conditions, with only 12,000 new jobs added in October. It’s worth noting that events like Hurricane Milton and the Boeing strike have distorted these numbers. The Fed is mindful of these trends and is likely responding to the need to support economic growth while being cautious about inflation, which has somewhat subsided.
**Host:** Regarding inflation, how does this affect the Fed’s monetary policy moving forward?
**Bales:** With inflation easing, the Fed has more leeway in its monetary policy. Joachim Schallmayer from DekaBank forecasts another cut in December, but it will be approached cautiously and based on thorough assessments of market conditions. Essentially, while the door is still open for further cuts, the Fed knows it must tread carefully to avoid any unintended consequences.
**Host:** That makes sense. There is a lot of speculation about how the upcoming administration changes might impact Fed policies, particularly given Trump’s past tensions with Chairman Powell. How do you see this playing out?
**Bales:** Indeed, Trump’s past remarks about Powell being an “enemy” due to interest rate hikes complicate things. Investors seem to believe that under Trump’s administration, any future rate cuts might be less aggressive than previously thought. The new administration’s potential focus on tax cuts and tariffs could drive inflation, prompting the Fed to adopt a more cautious stance moving forward.
**Host:** It seems like a delicate balancing act for the Fed. Lastly, how likely is it that Powell will maintain his position despite these political pressures?
**Bales:** Based on reports, Trump’s current economic team appears to favor Powell remaining at the helm of the Fed for now. However, political dynamics can shift rapidly, and uncertainties abound. It will be crucial to watch how the administration’s policies unfold and how those impact the broader economy and, consequently, the Fed’s approach.
**Host:** Thank you, Stephan, for your insights on this evolving situation. It’s certainly going to be interesting to see how these developments unfold in the coming months.
**Bales:** Thank you for having me.