The Federal Reserve is about to announce the latest interest rate decision at 3 a.m. on Friday Beijing time. Afterwards, Fed Chair Powell will give a speech, the first part of which is expected to be straightforward, but the latter may not be as easy.

After the Federal Reserve announced the widely expected 25 basis point rate cut, Powell will have to face a series of questions regarding what Trump's return to the White House will mean for economic growth, inflation, and borrowing costs.

Trump's shocking global election victory has led to a frenzy of repricing in global financial markets. Powell will need to assure global investors that the Fed can control the impact of Trump's second term and the potential 'Republican sweep', which has altered expectations for the monetary policy path.

Trump vowed to impose comprehensive tariffs on imported goods in the United States and reduce all taxes from corporate profits to overtime wages, which are widely believed to lead to inflation. He is also considering changes to the Fed's leadership and claims to have some say over interest rates.

After the election results tilted towards the Republican Party, investors have increased their bets on the so-called Trump trade, which is based on faster economic growth, but also higher inflation rates. On Wednesday, long-term US Treasury yields surged nearly 20 basis points, while the US stock market reached a historical high, and the dollar climbed.

Wall Street economists now believe the Fed's rate cut is likely to be smaller than before the election, as Trump's policy mix is still evolving. JPMorgan still predicts that the Fed will cut rates by 25 basis points this week and next month, but expects the Fed to slow down to cutting rates once every other meeting thereafter.

The pace of rate cuts will slow down.

JPMorgan's chief US economist Michael Feroli said in an interview: "For this week's interest rate decision, it doesn't mean much, and it may not mean much for December either. After December, the situation will become more interesting."

He said that the Fed does not know which policies proposed by Trump will be implemented, nor the order in which they will be implemented, and this alone could make officials more cautious in their actions. "When you are more uncertain, you may want to proceed more slowly."

Before the election, the US economy is expected to achieve the long-awaited soft landing. Although there are signs of weakness in the job market, the inflation rate has been trending lower towards the Fed's 2% target, and the unemployment rate has not soared. However, a series of new risks have emerged now.

Most economists believe that tariffs raising the cost of imported goods in the US and tax cuts stimulating consumer demand will lead to inflation.

The Republican Party led by Trump has already won the Senate, and if they can continue to control the House of Representatives, then Trump's ability to implement policy proposals will be strengthened - this possibility seems increasingly likely. He has also pledged to deport millions of illegal immigrants.

Nomura Holdings predicted in a recent report that under President Trump, the inflation rate in 2025 will rise by 75 basis points. The bank currently expects the Fed to cut interest rates only once next year, compared to the previous expectation of four rate cuts before the election.

"We expect Trump to implement his election proposal to increase tariffs, which will substantially boost inflation in the short term and slightly reduce economic growth," economists including David Seif wrote in a briefing on Wednesday.

After raising rates to a 20-year high last year, the Fed finally started cutting rates in September this year, and more evidence suggests that the US inflation emergency situation has ended. But for many voters, the sharp rise in living costs is crucial. An NBC News poll conducted in key states showed that about 22% of voters said inflation had caused "severe difficulties" for them in the past year, while 53% said it had caused "some difficulties".

The post-pandemic inflation experience has made Federal Reserve policymakers more sensitive to the risks of rising prices and the possibility of losing support. Any signs of inflation reacceleration mean the Fed either slows down the pace of rate cuts or abandons them altogether, which means interest rates will not fall as low as previously predicted.

All of this suggests that Fed meetings may become more unpredictable. Economists and investors believe that the Fed will cut rates by 25 basis points on Thursday. Stronger-than-expected economic data have eased concerns about worsening labor market conditions, making the smaller 25-basis-point rate cut more acceptable.

Powell may strive to appear as apolitical as possible in his press conference following this week’s decision. However, given the stakes of the election and the potential impact of Trump's policies on the economy and inflation outlook, investors will be highly alert to clues on how the Fed plans to steer the future path.

Non-political

Like most central banks around the world, the Federal Reserve strives to operate outside of partisan politics. Powell has repeatedly stated that the Fed's work is to react to and respond to the economy, not to preemptively act based on policies that have not been implemented.

"We are a non-political institution," he said earlier this year. "We do not want to be involved in politics in any way."

But undoubtedly, Trump's return to the White House on January 20th next year could reshape the economic environment that the Fed must navigate.

Taxation: Trump has pledged to extend the tax cuts passed during his first term (otherwise set to expire at the end of next year) and further reduce corporate income taxes.

Trade: Trump calls for imposing minimum tariffs of 10% to 20% on all imported goods, with tariffs on imports from China set to increase to 60% or higher.

Immigration: Trump promises the largest-scale deportation of unauthorized immigrants in history.

Energy: Trump's motto is "Drill, baby, drill", as he vows to cut regulations on oil, natural gas, and coal production, and offer more federal land for fossil fuel production.

Apart from the inflation impact, economists also suggest that Trump's policy agenda is likely to deepen deficits and strengthen the dollar. By 2024, the U.S. fiscal deficit will reach 6.5% of GDP, pushing the debt-to-GDP ratio to 100%.

How Trump's tax proposals will affect national debt

Bloomberg Economics estimates that Trump's proposed extension of income tax cuts and reductions in corporate taxes will lead the debt to reach 116% of GDP by 2028. The maximum version of Trump's tariff plan will result in varying price increases of 0.5% to 4.3% during the same period (depending on how many countries retaliate) and slow down economic growth.

As for Trump's immigration plan, a decrease in workers means a decrease in consumption, but it also implies a reduction in available foreign labor, causing labor shortages in industries such as construction and healthcare.

There is also the question of the Fed's position as an independent policy maker. During Trump's first term, when the Fed raised rates in 2017 and 2018, Trump implored Powell to lower rates, breaking the White House tradition of refraining from commenting on monetary policy details.

During President Trump's first term, documents from the Federal Reserve show that staff and officials predicted the impact of various situations (including raising tariffs and lowering taxes) on the economy, and only took action when the policies were actually implemented.

How policies evolve

Powell and his colleagues are not the only central bank officials who have to deal with the impact of Trump's reelection.

Due to the dominant role of the US dollar in trade and finance, the Federal Reserve's monetary policy decisions will affect exchange rates and often compel other countries to react.

This week, about 20 central banks globally (accounting for over one-third of global GDP) will decide on interest rates, including the Bank of England and the Swedish central bank, both expected to cut rates.

European Central Bank Vice President Luis de Guindos stated that if Trump continues to fulfill his tariff promises, global economic growth and inflation will face impacts. Additionally, higher US inflation rates and interest rates tend to attract capital, especially capital from emerging markets.

Currently, the Federal Reserve can continue to focus on employment and prices. Even if the Trump administration takes office, new policies or congressional votes will take time.

Chief Economist at KPMG Diane Swonk said: "After 2025, policies will impact the Federal Reserve, but they can only react once the policies are implemented. They will emphasize that any election result will truly depend on how policies evolve and how they affect the economy."

The Federal Reserve will not update its economic and interest rate forecasts at this month's meeting, with new forecasts scheduled for release in December. Powell may indicate that all options will be kept at the last meeting of the year, including keeping rates steady in the event of a reacceleration in the economy.

Powell has emphasized an approach guided by the latest data. With the world's largest economy preparing for a change under Trump's leadership, Powell and his colleagues may be more inclined to play it by ear.

Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said, "This is certainly not a period where they want to provide any meaningful forward guidance on policy direction. Uncertainty lies behind the data, but it is only amplified by uncertainty about future economic policy."

Editor/ping