The highly anticipated Federal Reserve (Fed) rate decision on Thursday is expected to be a non-event for most markets, with the exception of one crucial aspect – Chairman Jerome Powell’s response to questions regarding President-elect Donald Trump’s inflationary policy stance.
Background: The Fed’s Liquidity Easing Cycle
In September, the Fed delivered an outsized 50 basis points (bps) rate cut, marking the beginning of the so-called liquidity easing cycle. This development was seen as a positive sign for risk assets, including cryptocurrencies. The Fed funds futures show expectations for a quarter-point rate cut on Thursday and a similar move in December, followed by a pause in January and multiple cuts through 2025.
The Current State of Monetary Policy
The current target range of 4.75% to 5% for the Fed funds rate (benchmark borrowing cost) is significantly above the estimated ‘neutral’ level, which ranges between 3%-3.5%. This indicates that the Fed has ample room to normalize the overly tight monetary policy with rate cuts. The consensus among economists and analysts is that the Fed will continue to ease monetary policy to support the labor market, which cooled significantly in October.
Thursday’s Rate Cut: Priced In or Not?
The CME’s FedWatch tool shows traders assigning a nearly 100% chance of the Fed reducing the benchmark interest rate range to the 4.5%-4.7% range on Thursday. In other words, the 25 bps rate cut is already priced in and could potentially be a non-event.
Comments on Trump’s Tariffs Plan: A Concern for Markets
The cooling of inflation in the U.S. this year has shifted the Fed’s focus towards supporting the labor market by normalizing what has been an overly restrictive monetary policy. However, President-elect Donald Trump’s victory in Tuesday’s presidential election may disrupt these plans and create uncertainty for markets.
Trump’s economic plan includes tax cuts, loose fiscal policy, and high import tariffs on major trading partners like China and Mexico. These policies are likely to underpin inflation, potentially forcing the Fed to keep rates elevated. The market will closely watch Chairman Powell’s response to questions about Trump’s proposed policies during the post-rate decision press conference.
Bitcoin and Risk Assets: Vulnerable to Market Volatility
The BTC rally to record highs above $75,000 on Wednesday was fueled by hopes of friendlier regulatory policies under Trump’s presidency. However, if Powell expresses concerns about Trump’s proposed policies, markets may reassess expectations for rate cuts in the coming months. This could lead to downside volatility for Bitcoin and other risk assets.
Fed Errs on the Side of Caution: A Possible Scenario
After misjudging the coronavirus-induced supply-push inflation as transitory in 2021, there is a strong possibility that the Fed will slow down its normalization in anticipation of large tariff increases. Bank of America’s global research team noted that policymakers may err on the side of caution by pausing the cutting cycle if large tariff increases are announced.
"All else equal, we think further fiscal expansion means a higher terminal fed funds rate," the research team added. This implies that the Fed may prioritize caution over aggressive rate cuts in response to Trump’s policies.
Conclusion
While Thursday’s 25 basis point Fed rate cut is likely to be a non-event, Chairman Powell’s response to questions about Trump’s inflationary policy stance will be closely watched by markets. The outcome of this scenario will have significant implications for Bitcoin and other risk assets, which may see downside volatility if Powell expresses concerns about Trump’s proposed policies.
In conclusion, the market should remain focused on Powell’s commentary during the post-rate decision press conference, as it will likely determine the direction of interest rates in the coming months. The uncertainty surrounding Trump’s policies and their potential impact on inflation will keep markets on edge, making this Thursday’s rate decision a crucial event to watch.
Key Takeaways
- The Fed is expected to deliver a 25 bps rate cut on Thursday.
- The market has priced in the rate cut, making it a non-event for most markets.
- Chairman Powell’s response to questions about Trump’s inflationary policy stance will be crucial in determining the direction of interest rates.
- Bitcoin and other risk assets may see downside volatility if Powell expresses concerns about Trump’s proposed policies.
- The Fed may err on the side of caution by pausing the cutting cycle if large tariff increases are announced.
