Original | Odaily Planet Daily (@OdailyChina)
Author｜Nan Zhi (@Assassin_Malvo)
Yesterday, Trump won the US election, leading Bitcoin to break through the historical high, reaching a maximum of 76,400 USDT, and the crypto market rose as a whole. The US election is the most critical event after the Bitcoin spot ETF and the Ethereum spot ETF. After the election, the pace of the Fed's interest rate cut has become one of the few core issues at the macro level.
At 3 a.m. this Friday , the Federal Reserve will announce its interest rate decision. How much will the rate be cut this time? Will there be a large amount of money injection in the next few months? Odaily will summarize the views of all parties in this article.
A 25 basis point rate cut in November is a foregone conclusion
Markets have priced in a 25bp rate hike
First, in terms of data, according to CME Fed Watch, the Fed's 25 basis point rate cut in November is close to being fully priced in , with the probability currently reported at 96.8%.
According to Jinshi, considering that Fed Chairman Powell has said that the reasonable rate of interest rate cuts should be 25 basis points , and the economic data in the past two months has been relatively stable, although the non-farm payrolls in October weakened significantly, it was greatly affected by one-off factors. Therefore, it is still highly likely that the Fed will cut interest rates by 25 basis points this week, rather than another 50 basis point cut, or no cut at all .
The impact of expansionary fiscal policy after Trump's victory
JPMorgan analyst David Kelly said on Tuesday that the Federal Reserve will almost certainly cut interest rates by 25 basis points in its interest rate decision on Friday, even if the election is held before then. But Kelly further said 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 plan will push up inflation and prevent interest rates from falling .
Kelly noted that “if Trump wins the election, he will adopt a more expansionary fiscal policy, which may lead to a trade war, a larger deficit and higher interest rates.”
December rate cut still pending
Trump has successfully won the election, and as Kelly mentioned in the previous section, Trump's policies after his election will change the market economy and inflation situation. Analysts at Edmond Rothschild Group said in a report that under Trump's leadership, US inflation may rise rapidly . Specifically, trade tariff risks and the threat of deporting undocumented immigrant workers may push up US inflation rates. These factors may pose a challenge to the Fed's efforts to curb inflation. They said: " As the impact of Trump's plan on inflation becomes clearer, the Fed may partially abandon the 100 basis point rate cut plan expected in its latest report ."
CME Federal Reserve Watch data shows that the probability of maintaining 450-475 basis points in December is 32.7%, the probability of further cutting interest rates to 425-450 basis points is 65.2%, and there is another 2.1% probability of cutting interest rates by 25 basis points.
Nordea Bank analysts said that with Trump's victory in the US election and the Republican Party's high probability of controlling both the Senate and the House of Representatives, the market should expect most of his campaign promises to be fulfilled.
The Fed is likely to automatically cut rates by 25 basis points tonight and in December because they believe current rates are restrictive. If the current strong economic development continues, coupled with the impact of a Trump victory, it should soon make the Fed less certain that these preemptive rate cuts are necessary .
It will take some time for the inflationary impact of Trump’s policies to show up in the CPI data, but we should start to see the impact in terms of more hiring and lower immigration early next year. We are not sure when the Fed will finally decide to stop cutting rates, but it is most likely that the Fed will cut rates by another 25 basis points in March before the dovish FOMC is convinced, although there is a strong possibility that the Fed will not cut rates in 2025.
What about the medium term? Rate cuts may be coming to an end
Fund management company Navellier said that the expected Fed rate cut this time may be the last rate cut because the Fed does not like to go against market interest rates. But the specific situation still depends on Friday's FOMC statement and Fed Chairman Powell's press conference.
Not only do many people believe that the Fed's mid-term rate cuts have come to an end, but market data also show the same tendency. According to Jinshi , interest rate futures traders continue to bet that the Fed will cut interest rates by 25 basis points this week and in December, but now expect the Fed to stop cutting interest rates after two 25 basis point cuts in the first half of 2025, and the target range of the federal funds rate will drop to 3.75%-4%.
The underlying logic behind Trump's victory and the pace of interest rate cuts
Why will Trump's victory eventually lead to a slowdown or even an end to interest rate cuts? CICC explained in detail in a research report:
The research report pointed out that the U.S. real GDP in the third quarter of 2024 will be 2.8% year-on-year, slightly lower than the market expectation of 3.0%, and a slight decline from 3.0% in the second quarter, but it is still a brilliant answer.
In terms of sub-items, personal consumption expenditures are strong, corporate equipment investment is expanding, and exports and government spending are accelerating, indicating that the US economic growth is still healthy . Relatively weak is 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, which means that the US economy is heading for a soft landing. CICC believes that the Fed does not need to cut interest rates significantly for the time being.
Under normal assumptions, CICC expects the Federal Reserve to continue to cut interest rates, but the pace of cuts will slow down and the terminal (neutral) interest rate may also be higher than 4% in the baseline scenario.
In the extreme scenario, the Fed will turn hawkish and resume raising interest rates in 2025, as policymakers are unlikely to tolerate inflation rising above 5% . Considering that curbing inflation generally requires a nominal policy rate higher than inflation (i.e. a positive real policy rate), this means that the Fed may need to raise interest rates by 75 to 100 basis points in 2025.
