Original | Odaily Planet Daily (@OdailyChina)
Author | Nanzi (@Assassin_Malvo)
Yesterday, Trump won the US election, leading Bitcoin to break through its historical high, reaching a maximum of 76,400 USDT, and the cryptocurrency market also rose across the board. The US election is the most critical event after the Bitcoin spot ETF and the Ethereum spot ETF, and after the election is over, the pace of interest rate cuts by the Federal Reserve has become one of the few core issues at the macro level.
At 3 am this Friday, the Federal Reserve will announce its interest rate decision. How much will it cut this time? Will there be a big flood of money in the next few months? Odaily will summarize the views of various parties in this article.
A 25-basis-point rate cut in November is a done deal
The market has priced in a 25-basis-point rate hike
First, in terms of data, according to the CME Federal Reserve Watch, the probability of the Federal Reserve cutting rates by 25 basis points in November is close to fully priced in, with a current probability of 96.8%.
According to Jinshi, considering that Federal Reserve Chairman Powell has previously stated that a reasonable pace of rate cuts should be 25 basis points, coupled with the relatively stable economic data performance in the past two months, although the October non-farm payrolls were significantly weaker, but were largely affected by one-time factors. Therefore, a 25-basis-point rate cut by the Federal Reserve this week is still a high-probability event, rather than another 50-basis-point rate cut or no rate cut.
Impact of Trump's expansionary fiscal policy after winning the election
Morgan Stanley analyst David Kelly said on Tuesday that the Federal Reserve will almost certainly cut rates by 25 basis points in its interest rate decision on Friday, even if the election is held before that. But Kelly further stated that if Trump wins the US election this week, the Federal Reserve may suspend its easing cycle as early as December, and Trump's expansionary fiscal policy plans will push up inflation and prevent interest rates from falling.
Kelly pointed out that "if Trump wins the election, he will adopt a more expansionary fiscal policy, which may trigger a trade war, the deficit will expand, and interest rates will also rise."
The December rate cut is still uncertain
Trump has successfully won the election, and as mentioned in the previous section, Kelly said that after Trump's election, his policies will change the market economy and inflation situation. The Edmund de Rothschild Group analyst said in a report that under Trump's leadership, US inflation is likely to rise rapidly. Specifically, the risk of trade tariffs and the threat of deporting undocumented immigrant workers may drive up the US inflation rate. These factors may pose challenges to the Federal Reserve's efforts to curb inflation. They said: "As the impact of Trump's plans on inflation becomes clearer, the Federal Reserve may partially abandon its expected 100-basis-point rate cut plan in its latest report."
CME Federal Reserve Watch data shows that the probability of maintaining the 450-475 basis point range in December is 32.7%, the probability of further cutting to 425-450 basis points is 65.2%, and there is also a 2.1% probability of cutting another 25 basis points.
Nordea Bank analysis said that with Trump's victory in the US election and the high probability that the Republican Party will control both the Senate and the House, the market should expect most of his campaign promises to be fulfilled.
The Federal Reserve may cut rates by 25 basis points tonight and in December, as they believe the current interest rate is restrictive. If the current strong economic development continues, coupled with the impact of Trump's victory, the Federal Reserve should soon become less certain whether these preemptive rate cuts are necessary.
It will take some time for the impact of Trump's policies on inflation to be reflected in CPI data, but we should start to see the impact on more hiring and lower immigration in early next year. We are not sure when the Federal Reserve will ultimately decide to stop cutting rates, but the most likely scenario is that the Federal Reserve will cut another 25 basis points in March next year, although the possibility of no rate cuts in 2025 is also high.
What about the medium-term situation? The rate cut may be nearing its end
Asset management firm Navellier said that the expected Federal Reserve rate cut this time may be the last rate cut, as the Federal Reserve does not like to go against market interest rates. But the specific situation still depends on the FOMC statement and Fed Chairman Powell's press conference on Friday.
Not only do many parties believe that the Federal Reserve's rate cut cycle is nearing its end in the medium term, but market data also shows the same trend. According to Jinshi, interest rate futures traders continue to bet that the Federal Reserve will cut rates by 25 basis points each this week and in December, but now expect the Federal Reserve to cut rates by 25 basis points twice in the first half of 2025 and then stop cutting, with the federal funds rate target range falling to 3.75% -4%.
The underlying logic of Trump's victory and the slowdown in the pace of rate cuts
Why will Trump's victory ultimately lead to a slowdown or even an end to the rate cut? CICC provided a specific explanation in a research report:
The report pointed out that the US real GDP growth rate in the third quarter of 2024 was 2.8% quarter-on-quarter annualized, slightly lower than the market expectation of 3.0%, and also slightly lower than the 3.0% in the second quarter, but it is still a bright report card.
Looking at the components, personal consumption expenditure is strong, business equipment investment is expanding, exports and government spending are accelerating, indicating that the US economy is still healthy. Relatively weak are real estate investment and construction investment, indicating that high interest rates are still having a suppressive effect. In addition, inflation further declined in the third quarter, indicating that the US economy is heading towards a soft landing. CICC believes that the Federal Reserve does not need to cut rates significantly for the time being.
Under the normal assumption scenario, CICC expects the Federal Reserve to continue cutting rates, but the pace of rate cuts will slow down, and the terminal (neutral) interest rate may also be higher than the 4% in the baseline scenario.
And in the extreme assumption scenario, the Federal Reserve's attitude will turn "hawkish" and restart rate hikes in 2025, because policymakers are unlikely to tolerate inflation returning to above 5%. Considering that curbing inflation generally requires the nominal policy rate to be higher than inflation (i.e., the real policy rate is positive), this means that the Federal Reserve may need to raise rates by 75 to 100 basis points in 2025.
