Rounding a big week for macroeconomic and political news, the US Federal Reserve cut official borrowing costs by 0.25 per cent yesterday. Wealth managers speculate on what the likely path of policy under the forthcoming Trump administration will mean for inflation pressures.

Central banks continue to trim official rates, with the Federal Reserve cutting its key rate by 25 basis points to 4.75 per cent. (The UK’s Bank of England made a similar move yesterday.) Markets rose strongly on Wednesday after the clear-cut win for Donald J Trump in the Presidential elections. (See here for reactions to what the Republicans’ victory means for wealth managers.)

Here are reactions to the Fed’s decision:

Seema Shah, chief global strategist, Principal Asset Management
If anything, today’s Fed statement has a slightly less dovish slant. The subtle shift in tone suggests that the Fed may have lost some confidence in the disinflationary path – a dynamic that the US election result is likely to exacerbate.

Of course, Powell will avoid conveying any political opinion and will emphasize their data dependence. Yet, the potential for future trade and fiscal policies to impact the growth and inflation path means that the US election result may end up tormenting the Fed. For now, another cut next month is still likely. But beyond December, the rate path is very uncertain.

Kristina Hooper, chief global market strategist, Invesco
It will likely be up to the Fed to help support a sustained stock market rally, so we will want to look to Fed chair Jay Powell for clues as to what might cause the Fed to slow down or even pause its easing cycle. My base case remains an economic re-acceleration next year for the US and most other major economies, which should be supportive of risk assets. I anticipate small- and mid-cap stocks to be particular beneficiaries of this environment.

Joost van Leenders, senior investment strategist at Van Lanschot Kempen
In the press statement released before Fed chair Powell’s press conference, the Fed did not repeat its confidence that inflation is falling sustainably to the Fed’s 2 per cent goal. Fed chair Powel said the reference to improved confidence was only necessary to justify the first rate cut in this cycle.

Thus, it was interesting to see whether Powell would give any hints about further rate cuts, with the risks to the Fed’s employment and inflation goals roughly balanced. Another question was if and how the Fed would react to the election outcome. Following the Republican win in the presidential elections, in the Senate and possibly in the House of Representatives, markets priced in more inflationary policies. 

Fiscal policy is one of the many inputs into the Fed’s models and will only be included after actual policy decisions and implementation. For now, it is too early to take the increases in yields and in inflation expectations into account when considering future policy decisions.

Looking ahead, the overall arc is, according to Powell, that monetary policy is currently restrictive and that the Fed is gradually moving toward neutral. The rate cut today was another stap in that gradual removal of policy restraint. And this rate cut was possible with a cooling labor market and falling inflation. There are risks. Moving too gradually could re-ignite inflation, while moving too slowly will slow the economy and weaken the labor market more than desired.

Given the risks and uncertainty, Powell said this is not a time for strong forward guidance on interest rates. Given the graduality the Fed prefers, 25 basis point rate cuts in the next few meetings look like the Fed’s main scenario. But with strong economic data, including a re-acceleration of the labor market or sticky core inflation, a pause in December cannot be ruled out. Powell specifically mentioned that the downside risks to the economy have recently diminished.

Markets got the message that the outlook for gradual rate hikes has not changed. A pause in December would not be a strong surprise.

Tiffany Wilding, managing director and economist, and Allison Boxer, economist, at PIMCO
In a week with a US presidential election and market volatility, the Federal Reserve cut its policy rate 25 basis points as expected. Amid this noise and the generally positive messages from recent macro data, Fed chair Jerome Powell emphasized that downside economic risks had decreased, but the policy rate remains above neutral, suggesting that gradual cuts are still likely to come over time. Although he declined to provide guidance about the rate decision at the December meeting, he did emphasize that the recent presidential election would not affect that decision.

In our view, the signals from November’s Fed meeting alongside recent signs from macro data that the economy reaccelerated in [third quarter] – with the strong momentum likely to continue – suggest the odds of another rate cut in December have diminished. Given the Fed has already cut rates by 75 bps since September, it has flexibility to move slowly and methodically from here.

Powell declined to provide much guidance at the press conference, nor did the Fed release new projections at its November meeting. Statement changes were also modest, which Powell underscored in his comments. He also pushed back on the need for sharp policy moves in either direction, arguing that recent GDP revisions reduced downside risks relative to the state of the economy when the Fed last met in September, while also noting long-term inflation expectations remain anchored. Powell cited heightened uncertainty in the outlook, and we believe the Fed will move with caution as it slowly returns rates toward neutral, while remaining data-dependent.

Despite recent resilience, we believe the Fed has the flexibility to remain on a path toward modestly lower rates. Gradually rising unemployment in generally balanced labor markets supports a return to neutral. Given this year’s progress on inflation, we think the Fed can gradually bring rates down to a more normal or neutral setting, pausing as needed; it would take a significant acceleration in inflation – which we think is still a low probability at this point – to warrant a restart of hikes. October’s relatively soft employment report (even after smoothing temporary disruptions from hurricanes and strikes) also underscored the risk that a more material cooling of the labor market could prompt the Fed to cut more aggressively.