Topline

The Federal Reserve cut the Fed funds rate for the second time in a row on Thursday, but the economic policies of newly elected President Donald Trump have some economists questioning the path of interest rates heading into next year.

Key facts

What impact will Trump have on the Fed?

While this week’s Fed move didn’t involve much drama, economists at the major banks noted after this week’s election that there is additional variability going forward, potentially limiting the pace and size of further rate cuts be in danger. “The various policy uncertainties may cause the Fed to act more slowly than it otherwise would,” Michael Feroli, JPMorgan Chase’s chief U.S. economist, wrote in a letter to clients on Wednesday, predicting one rate cut per quarter to a level of 3.5%. Bank of America’s senior U.S. economist warns that Trump’s aggressive rate proposals could “derail the Fed’s austerity cycle” and that the Fed will refuse to cut rates further if major tariffs are announced. inflationary effects of tariffs. And Matthew Luzzetti, Deutsche Bank’s chief U.S. economist, notes it’s a “hawkish” outlook for the Fed heading into 2025, nodding to the potential for “stickier” inflation from rates.

Big number

4% to 4.5%. That’s where Luzzetti expects the Fed’s set rate to end up next year, almost a full percentage point higher than the average forecast of 3.4% that Fed staff shared in September.

Important background

It has been a whirlwind four years for monetary policy. The Fed cut rates to near zero in March 2020 in response to the sudden economic shocks brought on by the COVID-19 lockdowns. It then raised rates to a 20-year high of more than 5% in 2022 and 2023 in response to rising inflation, and moved toward cuts in the second half of this year as inflation eased. The central bank sets the target federal funds rate, which officially only determines borrowing costs in overnight transactions between financial institutions but has a major impact on interest rates across the country. That means lower interest rates generally help stimulate the economy because consumer and business borrowers are more likely to take on cheaper debt. But the Fed’s September rate cut did not have the desired effect as Treasury yields, which serve as a benchmark for market expectations for Fed policy, actually rose sharply. This week’s upward move in yields appears to be linked to inflation concerns arising from Trump’s proposed tariffs, which economists largely agree would raise consumer prices. But it is also a reflection of increased belief in the strength of the broader US economy, as better economic conditions make the need for stimulative rate cuts less urgent.

Surprising fact

Mortgage rates rose to a three-month high this week, with the average 30-year mortgage rate at 6.79%, according to federally backed lender Freddie Mac. That’s about 70 basis points higher than mortgage rates in the week after the September rate cut, reflecting the rise in 10-year U.S. Treasury yields.

Tangent

Despite the couple’s fraught history, Trump plans for Powell to end his term atop the Fed in 2026, CNN reported Thursday, citing an anonymous adviser to the newly elected president. Trump said in August that he believes the “president should at least have a say” in interest rates, a claim that would break precedent for the independently run Fed.

Crucial quote

“The Fed will be even more important in 2025 than it is today, if you can imagine that,” said Mark Malek, Siebert’s chief investment officer, in emailed comments.

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