Fed is widely anticipated to announce a 25bps rate cut today, lower the federal funds rate to 4.50%-4.75%. While Fed Chair Jerome Powell is likely to sidestep any definitive remarks about the implications of Donald Trump’s election win, the market will be watching closely for any signs of how Fed might respond to inflationary impacts from new fiscal policies.
Powell’s stance on inflation will be particularly scrutinized in light of expected policy shifts under Trump, especially on any indications that Fed is adopting a more vigilant approach toward inflation given that Trump’s policies could drive up spending, which might, in turn, fuel price increases. Any hint of a shift to a more defensive stance against price pressures could influence expectations for the rate path in 2025.
Although fed funds futures still reflect around a 67% probability of another 25 bps cut in December, this is slightly down from over 70% before the election. More importantly, Fed may move more conservatively in 2025, cutting rates only twice to reach a target range of 3.75%-4.00% by mid-year, then pausing for further assessment.
A key development to watch is the 10-year Treasury yield, which has been in a sustained rally since September. After gapping up yesterday, the yield is testing a critical technical level at 61.8% retracement of 4.997 to 3.603 at 4.464. Sustained break there will further solidify the case that correction from 4.997 has completed with three waves down to 3.603. Further rally should then be seen to retest 4.997 high next.
