Will the Federal Reserve lower interest rates this meeting despite the potential effects of Trump's victory?.. The expected scenario

Global markets are awaiting the monetary policy decision of the U.S. Federal Reserve, after the election results showed former President Donald Trump winning the presidential term, making him the 47th president of the United States, which has caused significant changes in market expectations regarding the course of federal interest rates.

What will primarily influence the Federal Reserve's decision tomorrow?

Recent data released last Friday showed a much greater than expected slowdown in the U.S. labor market, with the number of new jobs added by the non-farm sector dropping to its lowest level since 2020, recording only 12,000 jobs in October, after the previous month's jobs were revised down to 223,000.

This coincided with data from September indicating a slowdown in the Federal Reserve's preferred inflation gauge – the core personal consumption expenditures price index – to 2.1% year-on-year, approaching the Fed's target, allowing the central bank room to cut interest rates to provide some support for the U.S. labor market, which is indicating a sharp slowdown.

However, despite controlling inflation, the economy remains strong, according to preliminary growth indicators, despite recent challenges such as employment slowdowns due to weather-related factors and labor strikes, which has led economists to rule out a recession scenario. Nonetheless, the economic conditions support the argument for cutting rates this month following the Federal Open Market Committee meeting tomorrow.

While cutting interest rates may provide some relief, especially for borrowers, the immediate impact of rate cuts may be modest, as it typically takes longer for rate reductions to be reflected. For instance, credit card interest rates haven't dropped significantly, and mortgage rates have remained relatively high despite previous cuts by the Federal Reserve. In fact, mortgage rates rose slightly last month, affected by rising treasury yields and broader economic uncertainties, including the state of U.S. debt and elections.

On the other hand, the U.S. election data today showed Republican presidential candidate Donald Trump winning the presidential election after officially securing 277 electoral votes, surpassing the required 270 votes. He outperformed Democratic candidate Kamala Harris, who garnered only 224 votes, which poses upside risks to inflation amidst the policies Trump has promised, potentially leading to higher-than-expected inflation rates, which may limit the Federal Reserve's ability to cut rates in forthcoming meetings.

Expected scenarios for the Federal Reserve's decision tomorrow:

Scenario One: The most likely scenario is that the Federal Reserve will cut interest rates by 25 basis points at this meeting to support the labor market while keeping rates in a constrained region amidst continued upside inflation risks, moving the Fed away from the possibility of cutting rates by 50 basis points again.

At the same time, Powell is expected to discuss the possibility of the bank gradually continuing to cut rates over the coming months, with expectations of a 0.25 basis point cut at each meeting until mid-2025; by June, this scenario will likely have a less supportive effect on the U.S. dollar, amidst the strong support that the greenback has already received due to Trump's victory.

Scenario Two: The less likely scenario is that the Federal Reserve will cut interest rates by 25 basis points at this meeting to support the labor market while Powell indicates the possibility of pausing rate cuts in some of the bank's meetings over the coming months amidst continued upside inflation risks. This scenario will likely have a more supportive impact on the U.S. dollar.