In November, despite the Fed's expected rate cut, due to the complexity of the US political environment, the tax and fiscal policies of the elected president have become important variables affecting the 2025 market. The uncertainty of future monetary policy has significantly increased, and several analysts have lowered their forecasts for the number of Fed rate cuts.

Downward adjustment of the Fed's interest rate cut expectations for next year.

Data shows that market research institutions have reduced their expectations for a significant Fed rate cut in December. The current probability of a 25 basis points rate cut is 65%, compared to 83% a week ago. The latest adjusted forecasts of financial institutions, including Barclays Bank and DBS Bank. Both banks' research departments mentioned that the elected government may implement stricter immigration restrictions and increase import tariffs, which could stimulate inflation and change the Fed's interest rate path.

DBS Bank expects the Fed to pause rate cuts when assessing the impact of new policies on inflation and economic growth, predicting that the Fed will maintain stable rates between January and July next year. Barclays Bank has raised its inflation expectations for the US next year, forecasting that the Fed will cut rates twice in 2025, down from the previous estimate of 3 times.

Previously, Nomura Securities economists had revised the number of Fed rate cuts in 2025 from 4 to 1; Deutsche Bank expects the Fed to slow down or even pause rate cuts in December to observe the impact of policies on the economy.

Independence of the Federal Reserve under pressure

Amid the downward revision of rate cut expectations, Tesla CEO Elon Musk recently expressed support for the idea of ​​presidential intervention in Fed policy, further lowering the potential impact of the Fed under the new government for market research institutions.

Last week, Mike Lee, a Republican Senator from Utah, called on the Fed to "obey the president" on social media. In response, Musk released the "100" emoji on the 8th, indicating full agreement. Musk's comments, though brief, reflect the broader pressure that may be exerted on the Fed's independence in the next government. The Fed's traditional independence is aimed at giving the central bank the ability to formulate monetary policy based on the future health of the US economy.

On October 7, usa Federal Reserve Chairman Powell stated that even if the new administration asked him to resign, he would not resign because "the law does not allow it." This marks a potentially contentious relationship between the Federal Reserve Chairman and the President-elect.

Jeffrey Gundlach, CEO of DoubleLine Capital, believes that once the Republican Party controls both the House and Senate, the elected government will have greater fiscal operating space. He warned that if the new usa administration "loosens up" on fiscal matters, the usa fiscal deficit and national debt could increase significantly, leading to a rise in long-term interest rates and posing obstacles to Federal Reserve policies.

There is a high probability of long-term high usa interest rates.

"usa interest rates may stay high for a long time (high for longer), low interest rates are not the theme of this era." china international capital corporation predicted in its latest research reports that the policy of the new usa government is a significant variable affecting 2025, the Federal Reserve can continue to cut interest rates, but the space for rate cuts will decrease. The federal funds rate may be reduced to 3.75% to 4%, and then the rate cuts may stop. This level is about 150 basis points higher than the pre-pandemic neutral rate and higher than the current market's consensus expectations.

Renowned investor Stanley Druckenmiller also pointed out that if the Federal Reserve underestimates the persistence of inflation and continues to pursue loose policies, it may affect economic stability in the medium to long term. He believes that Powell should focus more on the long-term stability of the economy rather than short-term growth targets.

Previously, legendary usa billionaire hedge fund manager Paul Tudor Jones stated that he has adjusted his investment portfolio to include more inflation trades. He currently holds gold, bitcoin, and csi commodity equity index to hedge against inflation risks. Jones predicts that the next president will have to address the continuously expanding debt issue, otherwise the bond market may experience sell-offs, leading to a further increase in the 10-year Treasury bond yield.

Editor/rice