Once openly intervened in the Fed's decisions, now with Trump's 'second impeachment,' Fed Chairman Powell will have to answer a series of questions, namely, what will happen to economic growth, inflation, and borrowing costs once Trump returns to the White House?

At 3 a.m. Beijing time on Friday, the Fed will announce its interest rate decision, with markets generally expecting a 25-basis-point cut, but the key is what policy guidance the Fed will provide. At 3:30 a.m., Powell will hold a press conference, where he may try to show a lack of interest in politics, but given the stakes of the election and the potential changes in economic and inflation prospects due to Trump's policies, investors will be highly vigilant of any related guidance.

Trump's victory has triggered a frenzy of repricing in global financial markets, with increased bets on the 'Trump trade' - faster economic growth and higher inflation. Long-term U.S. bond yields have risen by nearly 20 basis points, while the U.S. stock market has hit historic highs and the dollar has strengthened.

Trump previously stated his intention to impose tariffs on all imported products in the United States and to cut taxes in all areas from corporate profits to overtime pay, all of which are widely seen as inflationary policies. He also considered changing the leadership of the Fed and claimed the right to comment on interest rates. During his first term, the Fed raised rates in 2017 and 2018, while Trump asked Powell to lower rates, breaking the White House's tradition of avoiding comments on monetary policy.

As Trump's policy mix is brewing, Powell needs to assure global investors that the Fed can handle the impact of Trump's second term. With the possibility of a Republican sweep of Congress, market expectations for the path of monetary policy have changed.

Wall Street is now cutting interest rate forecasts:

JPMorgan: Betting on a 25-basis-point cut this week and next month, but subsequent rate cuts are expected to be less than priced in before the elections.

Bank of America: If the new president significantly increases tariffs, the Federal Reserve may pause rate cuts.

Nomura: By 2025, the inflation rate will rise by 75 basis points. It is expected that the Federal Reserve will only cut rates once next year, while the expected number of rate cuts before the election is four times.

The specific impact of policies on inflation is unclear, and the Federal Reserve needs to slow down.

Michael Feroli, Chief U.S. Economist at JPMorgan, stated in an interview:

For Thursday, considering Trump's policies makes no sense, and for December, it may not be significant. But after December, the situation will become more complicated.

The Federal Reserve cannot know which policies proposed by Trump will be implemented, nor in what order they will be implemented, but just this uncertainty is enough to make officials more cautious. When you are more uncertain, you may need to slow down.

Diane Swonk, Chief Economist at KPMG, expressed a similar view:

As we enter 2025, policies will impact the Federal Reserve, but they can only react after the policies are completed. They will emphasize that any outcome of the election actually depends on how the policies evolve and how they impact the economy.

Most economists believe that increasing tariffs on imported goods in the USA and reducing taxes to stimulate consumer demand will lead to inflation. If the Republicans, who have already won the Senate, continue to control the House of Representatives, Trump's policy implementation capability will be enhanced, and all of this means that future Federal Reserve meetings may become more unpredictable.

The experience of inflation in the post-pandemic era has made the Federal Reserve more sensitive to the risk of rising prices. Any signs of inflation reacceleration would mean that the Federal Reserve either slows down the pace of rate cuts or abandons them completely, and interest rates will not be as low as previously predicted.

In addition, it is worth mentioning that the Federal Reserve is not the only central bank that will have to deal with Trump's reelection. This will force other central banks around the world to react. Around 20 central banks globally (representing more than one-third of the global GDP) are set to make interest rate decisions this week, including the Bank of England and the Swedish central bank, with both expected to cut rates.

Vice President of the European Central Bank, Luis de Guindos, stated that if Trump continues to fulfill his tariff commitments, the world will face economic growth and inflation shocks. In addition, US inflation and rising interest rates tend to attract capital away from emerging markets.

Editor/Rocky