At 3 am on November 8th peking time, the Federal Reserve will announce the latest interest rate decision. Currently, the financial markets almost certainly believe that the Federal Reserve will continue to cut interest rates by 25 basis points at tonight's monetary policy meeting. But in a suddenly more complicated context, the focus of the market is on the Federal Reserve's future work train of thought.

Currently, as the Trump policy combination is brewing, Powell needs to assure global investors that the Federal Reserve can handle the impact of Trump's second term. With the possibility of Republicans sweeping Congress, the market's expectations for the monetary policy trajectory have changed.

Wall Street is now cutting interest rate forecasts one after another, while traders are also reducing bets on Fed rate cuts next year, with the total expected rate cut by September next year only 100 basis points.

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.

Among them, jpmorgan economist Michael Feroli adjusted the forecast for the Fed's rate path, writing in a report on Wednesday that the Fed may cut rates by 25 basis points at both this month's and December's meetings, then start cutting rates quarterly from March next year, that is, cutting rates only once per quarter until the federal funds rate reaches 3.5%.

JPMorgan believes that Trump's ability to reshape the Fed may only slowly materialize over time.

Overall, the market is very concerned about how the Federal Reserve will respond to Trump's reelection and when the interest rate cutting cycle will end.

How to deal with the Trump era?

With Trump's return to the White House, his policies such as tax cuts, increased spending, and aggressive tariffs may impact the Fed's interest rate reduction path. Many economists believe that Trump's economic measures may reignite inflation. However, throughout Trump's entire first term, the inflation rate has remained below 3%.

During Trump's first term from 2017 to 2021, he often criticized Powell and the Fed, and supported low interest rates.

The above concerns will be the highlight of this Powell press conference.

In response, Nick Timiraos, a well-known journalist from The Wall Street Journal who is referred to as the 'Fed megaphone', wrote that officials will not change their policy stance until they see what actions President-elect Trump takes on tax, tariffs, and immigration reforms. However, if the Republicans also win control of both houses of Congress, Fed economists may begin to revise some of their basic assumptions at the December meeting.

Market expectations suggest that apart from the pause in rate cuts in January, there is considerable uncertainty about the Fed's interest rate trajectory.

Where will the terminal interest rate settle?

On the other hand, traders in the Fed fund futures market are betting on a significant rate cut, with the benchmark rate expected to decline to a target range of 3.75%-4.0% by the end of 2025, a full percentage point lower than the current level after a 50 basis point rate cut in September. Bank of America's secured overnight financing rate is more cautious, indicating that short-term rates by the end of next year will be around 4.2%.

"Fed Whisperer" Timiraos continues to state that after rapidly raising borrowing costs for two years to combat inflation, officials are trying to return interest rates to a more "normal" level. But they do not know what a normal interest rate is.

Before the 2008-09 financial crisis, many believed that the normal or "neutral" level of interest rates, which neither stimulate nor restrain the economy, could be around 4%. Currently, the benchmark federal funds rate is in the range of 4.75% to 5%. However, after the crisis and the extremely slow recovery, economists have concluded that this normal or neutral level may have fallen to around 2%.

Powell stated at the September press conference that he does not believe the Federal Reserve's policy rate will return to such a low equilibrium level. He said: 'We will wait and see, in my view, the equilibrium rate may be much higher than at that time.'

As the Federal Reserve lowers rates to lower levels, the question of the final destination will become more urgent. If the economy performs well, officials who believe the equilibrium rate is higher may eventually want to slow down the rate of interest rate cuts to avoid surpassing the equilibrium level.

In addition, the Fed's preferred PCE inflation has also been slowing down. The index rose by 2.1% year-on-year in September. Another indicator measuring so-called core inflation, excluding volatile food and energy prices, is at 2.7%.

Core inflation has significantly decreased from the level in 2023, which is why the Federal Reserve began cutting interest rates. However, if inflation appears to stall while the economy is thriving, some officials may request a slowdown in the pace of rate cuts.

Editor/ping