If Donald Trump’s victory makes anything clear, it is that the United States will enter a more inflationary period than expected, forcing the country’s Federal Reserve to reduce the pace of interest rate cuts. Now, The market estimates that rates will be 4% at the end of 2025, compared to the 3.75% that was estimated at the end of last week.
Tariff policy (which would cause an increase in the prices of certain products), a trade war with China or immigration control (restricting the access of immigrants and, therefore, less cheap labor that would raise the country’s wages) have been some of the proposals of the Republican candidate in his race for the White House that would once again add pressure to the CPI.
“In the longer term, a Trump victory is likely to mean a looser regulatory environment, an escalation of trade tariffs, and possible attempts to repeal components of the Inflation Reduction Act (IRA),” explains Blair Couper, director of abrdn investments. To this, Aaron Rock, head of nominal rates at abrdn adds that “the next challenge is how to combine rhetoric with policy. Trump’s first term offered an uneven panorama in this regard. We hope that tax cuts will soon occur for consumers and businesses, a key pillar of Trump’s populist outlook. Tariffs may increase over time, for now more of a threat than a reality. In any case, it seems very likely that a new fiscal expansion is on the way. This doesn’t sit well with Trump’s desire for the Fed to cut rates aggressively.“.
If last week another rate cut in 2025 was already erased, now the market is once again erasing one more. Thus, since last Friday, the market has gone from seeing interest points 125 basis points below the current level (5%) at the end of 2025 to seeing them at 100 points. That is, discounting the last drop that is expected in 2024, During 2025 there would only be three additional rate cuts of a total of 75 basis points. Thus, interest rates in the United States would be at 4% at the end of next year.
This Thursday, the US organization meets again and it is practically taken for granted that the Fed will cut againthis time 25 basis points, after the cut jumbo of 50 basis points from the previous meeting. This would be the last rate cut this year.
At the beginning of this year, the market expected US rate cuts of up to 150 basis points this year. Finally, if this Thursday’s cut occurs, the reduction during 2024 would be exactly half of what was forecast and the Federal Reserve would have lowered rates by 75 basis points.
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