In a unanimous decision made in the early hours of the day, Federal Reserve officials lowered the federal funds rate to a range of 4.5% to 4.75%. This is the second consecutive cut following the half-point reduction in September. The Fed is expected to continue its policy easing in the upcoming period; however, market observers’ expectations for the extent of rate cuts have diminished following Donald Trump’s election.
The statement accompanying the decision noted:
The economy continues to expand at a solid pace, with the unemployment rate rising slightly but remaining low.
While inflation is progressing towards the 2% target, it remains high, and any reference to further progress was removed.
The statement that the committee has gained increased confidence in inflation moving sustainably towards the target was also removed.
The assertion that risks to achieving the employment and inflation objectives are roughly balanced was maintained.
The rate cut decision came just days after Donald Trump’s sweeping victory in the presidential race, followed by a press conference by Chair Jerome Powell. Powell faced tough questions regarding the path forward for interest rates and his own role under the Trump administration. Trump frequently criticized Powell’s monetary policy decisions during his previous term—something prior presidents had generally avoided. In an interview with Bloomberg a few months ago, Trump even expressed that the president should have a say in rate decisions. This has led many to interpret Trump’s re-election as the beginning of a power struggle between Fed and “Trump 2.0.”
When asked if he would resign should Trump request it, Powell firmly responded “no,” emphasizing that the president does not have the authority to dismiss him or other senior Fed officials. Powell’s remarks clearly demonstrate his readiness to protect the Fed from political pressures, and he was notably cautious in speculating about the possible impacts of the new administration on monetary policy.
Powell noted that the timing and nature of any policy changes are unknown, adding that it is unclear how they would affect the economy and, therefore, how significant they would be in terms of monetary policy. While Powell indicated that future rate cuts are likely, he reiterated that policy decisions will depend on incoming economic data and stated that the Fed will not attempt to forecast fiscal and trade policy.
Before the election, Donald Trump pledged to implement more aggressive tariffs, restrict immigration, and extend tax cuts. Should these policies be enacted, they are expected to place upward pressure on inflation and long-term interest rates. This scenario would limit the Fed’s room for rate cuts, potentially forcing it to reduce the pace of its rate cuts.
Supported by consumer spending, the U.S. economy continued to grow at 2.8% in the third quarter. Although the labor market has softened moderately, it remains strong. In October, payroll growth increased by only 12,000 due to weather conditions and worker strikes, but unemployment held steady at 4.1%—a historically low rate.
Meanwhile, data released on Thursday showed that as the effects of hurricanes recede, jobless claims are decreasing. For the week ending November 1, claims increased by just 3,000 to 221,000, remaining below pre-pandemic averages. Continuing claims, however, rose to 1.89 million the previous week—the highest since November 2021. Thus, there is no significant rise in permanent layoffs in the U.S., though new hiring remains sluggish.
On the inflation front, the Fed’s preferred inflation measure dropped to 2.1% in September, yet core inflation saw its largest monthly increase since April, rising 2.7% from a year earlier. A separate report released Thursday showed that U.S. labor costs grew at a surprisingly strong pace in the third quarter. Unit labor costs—the cost for a business to pay employees to produce one unit of output—increased by 1.9% year-over-year. Additionally, inflation-adjusted hourly wages grew by 3% in the third quarter, marking the seventh consecutive quarter in which wages outpaced inflation.
Given the current outlook for the U.S. economy and the anticipated policy shifts under the Trump administration, markets now expect fewer rate cuts from the Fed. These expectations are driving up U.S. Treasury yields and strengthening the dollar. Meanwhile, expectations of tax cuts and a more relaxed regulatory environment under the Trump administration are pushing U.S. stock markets to record highs, despite rising Treasury yields.
Market focus has shifted to what the Trump administration and the Republican-controlled Congress may bring. With vote counts still ongoing for the House of Representatives, uncertainty persists. If Republicans gain a majority here as well, Trump will have more leverage to implement his promised policies, potentially supporting the rally in the dollar and stocks.
In the precious metals market, gold initially dropped around 3% following Trump’s victory but regained some of its losses in Thursday’s session. Although the Fed is expected to maintain its easing path, the reduced expectations for rate cuts are pushing Treasury yields higher, leading to selling pressure on non-yielding precious metals. While expectations for rising U.S. inflation next year keep gold’s outlook positive, in the short term, high yields are likely to continue weighing on gold prices.