Fed Rate Cut Preview: Powell's Take on Trump’s Tariffs

Anticipating a 25bps Fed rate cut, market focus shifts to Powell's insights on Trump's tariffs and their potential inflationary impacts on Bitcoin.

Fed Rate Cut Preview: Powell's Take on Trump’s Tariffs
  • The anticipated 25 basis point rate cut by the Federal Reserve (Fed) on Thursday is expected to be largely uneventful.

  • Market attention will be on Fed Chairman Jerome Powell's comments regarding President-elect Donald Trump's inflationary policies, which may influence market movements.

Overview

Traders in Bitcoin (BTC) are primarily focused on the Federal Reserve's upcoming rate decision, particularly the commentary surrounding the potential inflationary impacts of President-elect Trump's proposed policies. The rate cut itself appears to be already factored into market expectations.

Context

In September, the Fed implemented a significant 50 basis point rate cut, initiating a liquidity easing cycle that has positively affected risk assets, including cryptocurrencies.

Current futures markets indicate a strong expectation for a quarter-point rate cut this Thursday, with another similar reduction anticipated in December, followed by a pause in January and a series of cuts throughout 2025.

The Fed's current target range for the federal funds rate is set between 4.75% and 5%, which is notably above the estimated "neutral" level of 3%-3.5%. This suggests that the Fed has substantial room to adjust its monetary policy as the labor market showed signs of cooling in October.

Rate Cut Expectations

According to the CME's FedWatch tool, there is nearly a 100% probability that the Fed will lower the benchmark interest rate to a range of 4.5%-4.7% on Thursday.

This means that the 25 basis point cut is largely anticipated and may not significantly move markets on its own.

Trump's Tariffs and Market Implications

The decrease in inflation in the U.S. this year has shifted the Fed's focus towards supporting the labor market by normalizing its previously restrictive monetary policy. However, Trump's recent electoral victory could complicate these plans, leading to heightened market interest in Powell's views on potential inflationary pressures from Trump's proposed policies.

With Trump securing the Senate and possibly the House, his ability to implement tax cuts and an expansive fiscal policy, along with high import tariffs on countries like China and Mexico, could sustain inflationary trends.

During the press conference following the rate decision, Powell is expected to face questions regarding the election and the possibility of inflation rising under Trump's administration.

If Powell expresses concerns about Trump's policies, Bitcoin and other risk assets may experience volatility, forcing a reassessment of future rate cut expectations. Conversely, if Powell maintains a neutral stance and emphasizes a data-driven approach, the BTC rally may continue, especially after it surged to record highs above $75,000 in anticipation of more favorable regulatory conditions under Trump's presidency.

Caution from the Fed

Following a miscalculation regarding the transitory nature of inflation during the COVID-19 pandemic in 2021, there is a strong likelihood that the Fed will adopt a cautious approach to normalization in light of potential tariff increases.

Bank of America's global research team noted that policymakers might pause the rate-cutting cycle if significant tariff hikes are announced. They also indicated that further fiscal expansion could lead to a higher terminal federal funds rate.

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