US election places additional uncertainty on the Fed

The Fed’s November rate cut, though widely expected, sets a cautious tone as policymakers navigate a complex landscape under the upcoming Trump administration. With uncertainties around tax and trade policies, inflationary pressures, and economic resilience, the Fed is likely to slow its rate-cutting pace—underscoring the prolonged uncertainty in the Fed’s policy direction amid evolving fiscal dynamics.

At the November FOMC meeting, held just two days after the U.S Presidential election, officials lowered policy rates by 25 basis points to 4.50%-4.75%. Although the decision was fully anticipated by markets, the Fed’s path ahead is increasingly shrouded in uncertainty.

Fed Chair Powell has stressed that the central bank will wait for President-elect Donald Trump’s policies to take shape before responding to them. Not only is Trump’s ability to advance his agenda on taxes dependent on the final composition of Congress which may not be known for several days, and perhaps longer, but the full extent of proposed tariff increases is also unknown. Policy action often differs from policy proposals.

Yet, tax cuts and tariffs, among other policy proposals, have the potential to materially impact inflation, inflation expectations and economic growth. With policymakers already so cautious about the risk of renewed price pressures, particularly amidst the continued strength of the U.S. economy, the Fed will need to tread a cautious path.

The rising likelihood is that, come early 2025, rather than reducing policy rates at each meeting, the Fed is likely to slow its cutting pace to every other meeting—with some risk that rates don’t fall as far as either the Fed or the market had originally envisioned. An extended period of uncertainty lies ahead for the U.S. economy, none more so than the Fed’s policy path.

Principal Asset Management