30s Summary

The Federal Reserve is expected to cut rates by 25 basis points on Thursday, continuing a series of similar moves through to 2025. However, the market is more interested in its response to President-elect Trump’s inflationary policies. Negative reaction could trigger a drop in risky assets, including Bitcoin, but silence could maintain the cryptocurrency’s rally. Some financial observers believe further financial expansion, if accompanied by large tariff increases, could lead to higher terminal fed funds rate.

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Hey there,

We got some news on the financial front. So, this Thursday’s 25 basis point cut to the Fed rate probably won’t cause a huge stir. But, what everyone’s eager to hear is how Powell will react to questions about soon-to-be President Donald Trump’s ideas on inflation.

Let me give you a bit of background. Last September, the Fed cut the rate by a solid 50 basis points, which kick-started a good phase for a bunch of risky things, like cryptocurrencies. Now, everyone’s predicting there’s going to be a little quarter-point cut coming this Thursday, followed by a similar move in December. And then, they reckon rate cuts will keep happening on the reg till 2025.

Right now, the Fed funds rate (which is like a reference point for borrowing costs) is hovering between 4.75% to 5%. And that’s higher than the so-called “neutral” level (where rates aren’t stoking or dampening the economy), which is thought to sit between 3%-3.5%. Money-guys figure the Fed could – and should – aim to bring that rate down, especially since there’s been a bit of a chill on the labor market lately.

Now, let’s talk about this Thursday’s rate cut. All the signs point to it happening. Traders are pretty much betting their hats on the Fed dropping the benchmark interest rate range to between 4.5%-4.7%. So, nobody will be surprised – or fazed – if this cut happens. It’s all been accounted for.

What will ruffle some feathers are any comments on Trump’s plan for import tariffs. With inflation cooling its heels a bit this year, the Fed’s been keen to back up the labor market. But Trump’s win in last Tuesday’s presidential election could mess with this plan. And, the financial world is itching to hear Powell’s opinion on the matter.

These tariffs – along with tax cuts and loose fiscal policies – will likely push inflation up, maybe making the Fed keep rates high. If Powell expresses concerns about Trump’s suggestions at the press conference, things could get shaky for Bitcoin and other risky assets. If he keeps mum, though, and sticks to his habit of taking things as they come, Bitcoin’s rally should continue.

The story so far is, Bitcoin hit record highs beyond $75k on Wednesday. Folks are hoping Trump on the throne will mean more crypto-friendly rules.

The Fed might want to go easy, considering its past misjudgments about the effects of Covid on inflation. A cautious approach could see some slowing down on normalizing rates, just in case Trump sticks to his guns on increasing tariffs.

Bank of America’s research folks said on Tuesday, “We think policymakers could take a ‘wait and see’ approach to the cutting cycle if large tariff increases are announced.”

They also reckon, if all things stay equal, more financial expansion will lead to a higher terminal fed funds rate.

That’s it for now. Stay tuned for more!

Edit by Parikshit Mishra.