The US Federal Reserve is widely expected to cut interest rates, a decision that comes amidst debate about the actual need for further economic stimulus. Equity markets are near record highs, house prices are elevated, gold is at a record high, and the US national debt has reached a record high, all while inflation remains above the central bank’s target. Despite these factors, a rate cut seems imminent, igniting discussions about the true state of the US economy.
President Trump’s influence adds another layer to the situation. His administration has openly advocated for lower rates, though Trump has seemingly reduced his direct criticism of Fed Chairman Jerome Powell recently. Powell has maintained the Fed’s independence, and will likely state that the rate cut is unrelated to political pressure. Still, analysts suggest the cut has shifted from a possibility to a near certainty in recent weeks, with little pushback observed.
According to Bank of America strategist Michael Hartnett, a ‘dovish’ cut is needed to fuel a Santa rally, where the Fed explicitly signals future rate cuts. BCA Research’s Marko Papic suggests further clarity on the Fed’s direction might not emerge until May, when Trump could potentially appoint his own choice as Fed chair. Both Papic and Hartnett anticipate the Fed and Trump administration will likely maintain a market-supportive stance at least until the middle of next year.
Trump’s low approval ratings are also a consideration. With the midterm elections approaching, Trump may focus on lowering prices and improving affordability. Analysts expect potential government intervention to reduce costs in sectors like healthcare and housing, and that Trump may even employ the use of tariff adjustments to stimulate the economy by cutting tariffs on popular imported goods.
