Trump’s Election Raises Inflation Fears as Fed Prepares Second Rate Cut

The Federal Reserve is set to cut its benchmark interest rate for the second consecutive month on Thursday in an effort to further ease inflationary pressures that have concerned American consumers and played a role in shaping the recent U.S. election results.

The move comes while inflation, which surged to record highs during the pandemic recovery, has shown signs of slowing.

However, President-elect Donald Trump’s proposals have raised concerns about potential inflationary pressures, complicating the central bank’s decision-making process.

Trump’s economic agenda includes widespread tariffs, higher taxes on imports, and large-scale deportations. It is viewed by many analysts while potentially inflationary, which could undermine the Fed’s progress in taming inflation.

Can Trump Influence Fed Decisions?

The central bank has long defended its autonomy, stressing that decisions on interest rates should be driven by economic data, not political pressure.

However, President Donald Trump has made it clear that he believes the Fed should take his economic policies into account.

During his first term, Trump frequently criticized Fed Chairman Jerome Powell, in particular when the central bank raised interest rates in an effort to curb inflation.

Trump’s vocal discontent raises the specter of political interference in monetary policy, a concern that could continue to shape the Fed’s actions in the coming years.

While growth remains solid, with the economy expanding at a rate just under three percent over the last six months, other signs are more concerning.

Job growth has shown signs of slowing, and despite robust consumer spending—especially from higher-income households—there are concerns that the economy is nearing a turning point.

Why Will Interest Rates Go Down?

Fed officials, including Powell, indicated that the latest rate cuts are designed to support the labor market, yet there is growing uncertainty about whether such moves will continue to yield results if inflation pressures mount again.

With borrowing costs rising on everything from mortgages to car loans, some analysts fear that the Fed’s efforts to reduce interest rates may not have the desired affect on consumer behavior if longer-term borrowing costs remain elevated.

Since the Fed’s September rate cut, Treasury yields have surged, reflecting investor expectations of stronger economic growth, rising inflation, and potentially larger federal budget deficits under President Donald Trump.

This phenomenon—referred to on Wall Street as the “Trump trade”—has led to higher borrowing costs, which in turn has dampened the intended effect of the Fed’s rate reductions.

What Happens if Inflation Rises Again?

Trump’s proposed trade policies, including a 10 percent tariff on all imports and additional taxes on Chinese and Mexican goods, could reignite inflation.

Economists estimate that such measures could push inflation back up to 2.75 percent or even 3 percent by mid-2026, according to Goldman Sachs.

This would represent a significant shift, as inflation has been relatively stable at 2.1 percent in recent months, based on the Fed’s preferred gauge.

Such an increase would likely alter the Fed’s path, making it less likely that the central bank will continue with its rate-cutting cycle.

Markets are increasingly pricing out the possibility of further rate cuts in 2025. As of Wednesday, futures prices suggest only a 28 percent chance of a rate cut in January 2025, a sharp decline from nearly 70 percent a month ago.

The Fed’s dilemma is now a balancing act: while the economy shows signs of resilience, including strong consumer spending, there are growing concerns that additional rate cuts could overstimulate the economy, reignite inflation, and potentially undercut the central bank’s own policy objectives.

If inflation begins to rise again, the Fed may face increasing pressure to halt or reverse its rate cuts. For now, the central bank will likely proceed with its Thursday rate cut, but how much further it will go in reducing borrowing costs in 2025 remains uncertain.

This article contains additional reporting from The Associated Press