The dust has barely settled on Donald Trump’s historic election victory and the president-elect is already facing another battle. He is about to go head-to-head with an old sparring partner, US Federal Reserve (Fed) Chair Jerome Powell. How the two key public figures work together could determine how long the stock market rally lasts.
While the stock market appears to love Trump’s win, the bond market is less sure and further uncertainty about the direction of rates is never far away – especially long bond rates which are not explicitly directed by Fed policy. But the market was happy to embrace Thursday’s rate cut of 25 basis points (bps), coming on the heels of the 50 bps cut in late September.
Source: Yardeni Research
Trump and Powell are at odds over the role the president should play in monetary policy. Trump wants a say, but Powell (and almost all developed market central bankers) believes the Fed should be independent. The president-elect has previously said Powell could stay on until his term ends in May 2026, “especially if I thought he was doing the right thing.”
The conflict could spill over into policy. If Trump’s expected fiscal spending and tax-cut plans become a reality, then he’s ultimately going to need the Fed’s help through lower interest rates. However, Trump’s plans could stoke inflationary pressures, which would likely prompt a hawkish response.
Source: Yardeni Research
Traders lowered the chances of a December rate cut in the aftermath of Trump’s win, even though he won’t take office until January.
Just before the Fed decision, we got the Bank of England’s. As expected, a 25 bps cut, bringing the bank rate down to 4.75%. However, the accompanying statement warned of keeping rates restrictive long enough to tame inflation, and that they will be careful not to cut too fast or by too much.
In other news, Sweden’s Riksbank cut rates by 50 bps down to 2.75%, while Norway hasn’t even started its easing cycle and held firm at 4.5%. Brazil on the other hand hiked their rate by 50 bps to 11.25% aiming to bring inflation back to target and support economic stability.
Despite the movement amongst other central banks, our view remains that the Reserve Bank of Australia (RBA) will exercise caution and keep rates where they are until their next meeting in February 2025.
Budget deficits compared…Australia has a lot of firepower yet to be deployed.
Source: Torsten Slok
