The U.S. Federal Reserve reduced interest rates by a quarter-point on Thursday, unfazed by the political climate surrounding Donald Trump’s election victory. The decision, which lowers the federal funds rate to a range of 4.50% to 4.75%, was met with unanimous approval by the central bank’s policymakers. It comes as the Fed faces intense scrutiny under a transitioning political landscape, with President-elect Trump set to take office in January, succeeding Democratic President Joe Biden.
While Washington reels from the political implications of Trump’s win, the Fed’s response to the election outcome was characterized by restraint and adherence to its traditional nonpartisan stance. Fed Chair Jerome Powell made it clear that the central bank’s mandate and upcoming policy direction would not be dictated by the recent political shift.
“In the near term, the election will have no effects on our policy decisions,” Powell asserted, addressing reporters. He highlighted the ongoing uncertainty regarding Trump’s economic strategy, which is expected to come into sharper focus as the new administration begins. “We don’t guess, we don’t speculate, and we don’t assume,” he continued, drawing a firm line between the Fed’s decision-making and the political currents influencing other areas of government.
With concerns surrounding the Fed’s independence looming, Powell’s comments sought to reinforce the central bank’s autonomy. He made it clear that he had no intention of resigning even if pressured by Trump, adding that it would be unlawful for any administration to prematurely remove a member of the Fed’s board of governors. The U.S. central bank’s independence has long been enshrined in its dual mandate: to control inflation and promote maximum employment, free from political interference.
This commitment to autonomy aligns with Powell’s broader message that the Fed’s focus remains firmly on the economy, despite the election drama playing out on Pennsylvania Avenue. The rate cut, the second in a sequence following a larger half-point reduction in September, is intended to reduce the cost of borrowing, offering some relief to households and businesses affected by the high cost of living. The Fed has also projected further rate cuts as it moves through its current easing cycle.
Despite recent political shifts, the Fed’s primary concerns remain centered on economic indicators. Inflation, while significantly reduced from its post-pandemic peak, is still an ongoing issue that the Fed is closely monitoring. Its preferred measure of inflation, the Personal Consumption Expenditures (PCE) price index, recently fell to 2.1% in September, showing a marked improvement after a turbulent period.
Economists widely interpret Thursday’s rate cut as part of the Fed’s strategy to support an economy that has exhibited both resilience and vulnerability. Recent months have seen robust economic growth tempered by a slowdown in hiring. October saw a decline in job creation, attributed in part to unfavorable weather and a labor strike. However, the overall strength of the labor market remains intact, reinforcing the Fed’s outlook of a resilient economy capable of withstanding further political and economic shifts.
“Generally speaking, the U.S. economy looks quite resilient, and the labor market still looks very good,” said Jim Bullard, the former St. Louis Fed president, in an interview before Election Day. The Fed’s cautious optimism indicates that its attention is firmly placed on economic fundamentals rather than the political landscape.
With a new administration on the horizon, market analysts are considering how the Fed’s rate cuts might interact with the broader economic policies expected under President-elect Trump. Markets responded cautiously to the Fed’s announcement, keeping a watchful eye on Trump’s stated fiscal policies, which include potentially aggressive tax cuts and deregulatory measures. Although lower interest rates typically benefit markets, there are concerns about how Trump’s policies may affect fiscal stability and inflation in the medium term.
JP Morgan’s chief U.S. economist, Michael Feroli, noted the Fed’s likely trajectory, forecasting an additional rate cut at its December meeting if economic data continues on its current path. “The tone from Powell today made us marginally more confident in our call for another 25 basis point cut then,” Feroli wrote, reflecting a view that the Fed may seek further rate reductions to stimulate demand and encourage spending amid political uncertainty.
Financial markets are also keeping a close eye on Congress. While the Republicans have maintained control of the House, giving Trump a significant advantage for implementing his agenda, a “Red Sweep” through both houses could have mixed implications for financial stability. According to Bullard, markets often favor divided government, as it can constrain fiscal policy and prevent excessive spending, which in turn can moderate inflation and maintain economic stability.
Trump’s election victory has resurfaced questions about the Fed’s independence, with the President-elect’s past criticism of Powell and the central bank’s policies raising eyebrows among policymakers and economists alike. Trump, who originally appointed Powell, has been vocal about his dissatisfaction with the Fed’s rate hikes under his administration, even suggesting that the Fed acted to favor Democrats. He has indicated that he may seek to replace Powell once his term expires in 2026, fueling speculation that Trump might attempt to steer the central bank’s policies more directly.
Republicans now hold a majority in the Senate, giving Trump significant influence over the next Fed chair nomination. The President-elect has also hinted that he would like more control over interest rate decisions, a proposal that has raised alarms about the integrity of the Fed’s independence. Traditionally, the Fed has operated without direct intervention from the executive branch, a principle viewed as essential to its ability to make impartial decisions in the interest of the economy as a whole.
Such moves could pose a fundamental challenge to the central bank’s mission. Critics argue that any political interference would risk undermining confidence in the Fed’s ability to manage inflation and unemployment effectively, potentially leading to volatile markets and higher borrowing costs.
As Trump prepares to take office, economists are debating the longer-term impact of his policies on the U.S. economy. His election campaign emphasized the need to address post-pandemic inflation, a promise that resonated strongly with voters who have struggled with the rising cost of living. Polls and surveys indicate that dissatisfaction with inflation was a key factor in Trump’s victory, and he is expected to prioritize inflation-control measures alongside his broader economic agenda.
Looking ahead to 2025, Nationwide’s chief economist, Kathy Bostjancic, predicts that the Fed may have to adapt to a rapidly changing economic environment. “I do think as we get into 2025, they are going to have to consider that,” Bostjancic told AFP, referring to the potential for more aggressive monetary policy in response to anticipated fiscal changes under Trump’s leadership.
