Federal Reserve cuts interest rate by 25bps in first post-Election move

[Joseph Wang]

This is well anticipated by the market, so there was no surprise here. Now, the way the Fed works is that they’re very conservative and very slow moving, so they don’t want to surprise the markets. So they’ve been very candid that you know this is going to be a rate cut now, and most likely a rate cut in December as well. But because we did have some, you know, a bit of a change in the world this past week, I think it’s going to be much cloudy, hitting forward, because there could be some big changes in economic policy next year, and the Fed is going to be thinking about what that might mean for growth and inflation. So there’s a lot of anticipation here for the upcoming press conference to know what the Fed is thinking and of course, in the past, President Trump has made commentary on the independence of the Fed, and maybe that could change as well. So there’s a lot of things happening in the world that could impact monetary policy. But for today, though, this is not going to be super eventful.

[Simone Del Rosario]

Okay, so you touched on a lot of things, and luckily, we’ve got 18 minutes to talk before we hear from Fed chair. Jerome Powell, so we do have a lot of room to talk about what’s going on here. Let’s first dig into those policies. What sort of policies are you expecting might change the Federal Reserve’s path? As you know, consumers know, the rates have been high for a very long time. As the Fed has been trying to bring down inflation, we’ve finally kicked off this rate cutting cycle, as inflation has come much closer to the Fed’s 2% target. So how might some policies change things from from the baseline expectations.

[Joseph Wang] 

So President Trump has so I think first of all, we have to realize that what people say on the campaign trail is often different from what they actually do in office. So it’s really hard to make a judgment at the moment, but there has been some analysis by non partisan organizations that suggest a Trump presidency could entail a lot more spending, and when you have a lot more fiscal spending, you know that that usually puts upward pressure on growth and inflation. Now, in addition to that, President Trump is well known for his stance on immigration, he would like to have a more secure border and more legal immigration. Now, over the past few years, we’ve had tremendous amounts of illegal immigration to the tune of millions and millions. Now that has, I think, put downward pressure on labor. So maybe if we have fewer people entering the country, we might have higher wages. Now, I think that would be a great thing for the American worker. But it could also change the Fed’s calculations when it comes to inflation, since one of the big inputs to inflation are is services, and services is higher driven by by labor. And of course, we also have Trump’s views on trade policy, if we have more tariffs. Now, I don’t know if this will actually happen. It could just be a negotiating tool. It could increase import costs. Again, these are all things that are up in the air. We don’t know what will actually happen. We don’t even know what the Trump’s cabinet will look like next year, but these are all potential things that could impact growth and inflation and will have to be on the Fed’s mind. And of course, ultimately, Senate independence matters as well, and we won’t know much about that until next year as well.

[Simone Del Rosario]

It is interesting, because inflation was such a big conversation this election cycle. But to your point, the independent analyzes believe that Trump’s campaign promises again, we’ll see what happens in January. But like you said, a lot of these things add inflationary pressures. So how much of his policies do you think would be implemented and and more importantly, what are businesses doing today to prepare for the Trump presidency? Is there a concern that in anticipation of tariffs, in anticipation of higher cost of goods being imported, businesses might already raise the price on consumers,

[Joseph Wang]

so that is possible. So I hear a couple of ways that businesses are getting ahead of put. Potential change in policy. So one way, of course, is to stockpile goods. So if you do that again, maybe you get to buy before the tariffs come online, and that sudden surge in demand could increase prices a bit. Another way businesses are trying to get ahead of this, especially foreign businesses, is actually just building factories in America so that in the future, you know, let’s say that we do have less international trade between, say, the US and China. Well, you know, you could build factories in America or in Mexico or in other countries that would help them get around that. And that’s been something that’s been happening since the first Trump administration. So maybe it’s getting some new urgency right now, but a broader point that I will note, though, is that heading into this election, a lot of businesses, according to surveys that I read, have been slowing down hiring and slowing down their investment. Now, Vice President Harris and President Trump had very different visions of the world. So if you’re a business, obviously you have to be a bit more prudent and try to plan ahead of that? Well, you can’t plan ahead what you don’t know, so you got to wait, and then when you get clarity, you can do something. So I think that even though we had a slow patch in the economic date of the past few months, this clarity we get got in November is going to help businesses plan better, and it should be positive for the economy, at least for the next few months, especially since President Trump, is perceived to be by the business community, to be more business friendly.

[Simone Del Rosario] 

We’ve seen it in equities just since Trump won the election. Businesses are seen to be an investor seem to be very happy with the result right now, and are really taking off. And there hasn’t been a ton of correction today from from the records being hit yesterday. In fact, the stock market’s up even more. Do you anticipate that movement to continue as as the way you see it, businesses are feeling like the environment might be loosened up and growth might be loosened up to be able to explode even further. That’s

[Joseph Wang]

certainly the markets verdict. Now, when you look, when I look at the markets, you have to look at various asset markets, beyond equities, equities up, yes, also interest rates up, but also the US dollar is up. Now, when you take these things together, it’s very clear the markets perceive a positive growth shock with a Trump presidency. And I think that’s reasonable. If we think back to the first Trump term, there was a lot of deregulation, there was a lot of fiscal spending, and it was a time when there was strong growth and low inflation, and so maybe a lot of the investors remember that so so far, it’s been looking like the market is anticipating better growth going forward,

[Simone Del Rosario]

and you mentioned those higher interest rates expectation, so that would, I guess, would that change the direction that the Fed is going, or the the slope of the Fed’s direction? Yeah, so

[Joseph Wang]

over the past few months, the market has been pricing and a lot of Fed cuts. Now the reason for that is because the market has been anticipating a recession. Now we’ve seen the job numbers every month. They’ve they’re growing, but they’re growing at a decelerating rate. So right now, the market is seeing that, you know, going forward, we have a new change in policy. Maybe we get a lot more spending. Maybe this growth thing is going to turn upwards, and so it’s beginning to see that, you know, maybe we’re not going to go into recession, and if we’re not going to go into recession, that also means that the Fed does not have to cut rates as much. And so even though the market is pricing in one more cut this year in December, it’s pricing in a lot fewer cuts next year, and that’s pushing interest rates upwards. So the positive interest rates is consistent with the perception that we’re going to have a better economy, more growth going forward.

[Simone Del Rosario]  

We had such a weird jobs report that just came out, especially in contrast to the month before. The month before was well above expectations and above the 12 month moving average, more than 220,000 jobs added. Upon revision this last jobs report showed 12,000 jobs added. We had strikes going on at the same time. We had two hurricanes and the effects of that. Do you think the Fed is ignoring that black mark of a jobs report, given everything that’s going on?

[Joseph Wang]

I hope so. I mean, like you mentioned, Simone, you had a lot of crazy things happening that month. You had the strike with Boeing, you had the disasters we have in North Carolina. You have the hurricanes and so forth. So that’s that job report. I would just throw it in the garbage can. It’s not going to be very helpful. There’s just too many confounding factors. But the trend, though, is very clear that the labor the labor market is softening, and that is a reason why that we’re cut. The Fed is cutting rates today and is likely going to cut rates in December as well. Now going forward, though, like I suggested earlier, businesses seem to have slowed down their hiring in part due. To election uncertainty. So going forward, maybe the job growth will pick up again, and that could lead to fewer rate cuts next year, as the market is currently expecting.

[Simone Del Rosario]

Let’s talk about what Fed Chair Jerome Powell is going to say again. He’s going to be coming on on this live stream and speaking in nine minutes, you’ll be able to hear from him. You know, he likes to keep things pretty close to the vest, as far as not looking too far into the future, trying to be very clear with what he is saying. What do you expect him to say today? Do you expect him to make comments about the results of the election and how that might impact their policy plans moving forward?

[Joseph Wang]

I expect him to be asked about that in 10 different ways by every single person there. And I expect him to say nothing about it. He will chair Powell, over the past, over throughout his tenure, has been very, very, very, very well very, very politically astute about this. Very curious to say that he stays in his lane running monetary policy. Will not comment on other parts of the government, but unfortunately for him, other parts of the government have been commenting a lot about the Fed and him, particularly now when we think back to the first Trump administration, President Trump has been very vocal in his displeasure on the performance of chair Powell. Now I think what the what will be asked of chair Powell as well is on the Fed independence. So in addition to potential changes in economic policy, is he worried about changes to fed independence? Now, Chair Powell is probably going to say that he will do his job as it was given to him by Congress. But note now that President Trump won the election with a commanding lead with a popular vote, and looks like he’s going to sweep Congress as well. And so that tells the world that President Trump has popular support and mandate to maybe also influence monetary policy as well. And so going forward, I think that’s something that we need to bear in mind of whether or not we will have maybe a less independent fed and that’s not necessarily a bad thing, but it will be different.

[Simone Del Rosario]

Okay, so let’s just cover a little bit of the history here Fed chair. Jerome Powell is a Republican. He was first appointed to the Fed chair position by former President Trump during his first term, he was reappointed to that position by President Joe Biden, but in Trump’s first term, they had very public feuds about interest rates. Trump wanted him to lower interest rates. Was strong arming him, while the Fed maintains its independence, stays as an apolitical body and makes monetary decisions based off of what’s best for the economy in their minds at that moment, and not who’s in the White House since that time, as president, Trump has been running for this re election campaign. He’s been, you know, there’s been a lot of whispers to your point, of people who are expected to be working in his in his new administration, people who are his aides saying that they want Fed Chair Jerome Powell out of there, despite the fact that his term goes up until 2026 that all laid aside. I know, obviously, that you know, that I just wanted to kind of go over what’s going on right now as we get into what is a consequential election for Fed chair, Jerome Powell, as he’s about to be working with a president who very publicly disliked him, even though he was the first to appoint him, let’s talk about what those options are. There were whispers about a President Trump appointing a shadow chair. Which would, you know, kind of cut off Fed chair? Jerome Powell’s power? What do you what do you make of those types of things and possible actions that will be taken once, once Trump is back in the White House.

[Joseph Wang]

Now, there’s a very good summary of the recent history there. Now, when you have control of Congress, basically you have a whole bunch of tools that you could do to influence the Fed. Like you noted, one of the potential Trump treasury secretaries has floated that idea where maybe Trump could just nominate and confirm the next Fed chair, after Jay Powell, and just have this Fed chair go around and give all sorts of speeches and influence the markets in that way that’s very creative. I don’t know that will happen. Or you could just pass new laws, nominate new governors, pack the Fed, or you could have legislation that maybe defines defense mandates in ways that are pleasing to the executive. Or if you look back to history in the beginning, in the when the Fed first started in the early 20th century, the Treasury Secretary actually sat on the FOMC. They’re participating in the discussion. So there’s a whole whole bunch of ways this can go, simply because Trump has control of well, you. Republican Party has control of Congress, and also it’s seemingly a popular mandate. So if President Trump would like to exert more influence on the Fed, he can absolutely do it this time around, simply because the political landscape has changed. Now I suspect that you know the Fed is going to be aware of this at the end of the day, the Fed is a group of unelected people who serve the public, and so they are, you know, they have to bend to the popular will, and we’ve seen that happen in the past as well. Let’s say, in the 1970s chair burns at the time, he was living in a time that was very populist, and in his speech the anguish of central banking, which he gave after he left the Fed, he noted that a lot of changes in the politics, in the culture at the time made it very difficult for him to be tough on inflation, and made it so that he had to keep rates a little looser, simply because that was the spirit of the era, and maybe we are in another such era as well. That’s certainly what the election suggests to me,

[Simone Del Rosario]  

knowing how Fed Chair Jerome Powell moves. Do you anticipate that regardless of any friction, he’s going to remain in the chair until the end of his term? Yes,

[Joseph Wang]

I have confidence that will happen. President Trump as I recall. And again, political figures say many things. Sometimes they change their mind, political President Trump has suggested that he would let Powell serve out his term, just also noting that he thinks of he’s a experienced businessman, and maybe, you know, he could have some suggestions as well, but would never order the Fed chair to do anything.

[Simone Del Rosario]

Let’s, let’s talk a little bit about that, because I’ve thought about this a lot, this idea, you know, Trump is very involved in in the business world, and has been his entire life, something that is different from other presidents. So when we talk about whether or not the Fed should be independent of who’s in the White House, just because President Trump wants a say in what’s going on economically, does that mean that that is what is best for every administration in the future?

[Joseph Wang]

No, you’re exactly right now. The reason that we have an independent central bank is because the political branches often have a temptation to do things that are good for them today, for their current election cycle, that have bad consequences later on. And you see this in Latin America all the time. Government comes to power, spends a whole bunch of money to get elected, and then the inflationary problems someone else’s problem. So we don’t want that to happen here. Now, that being said, like you mentioned before, sometimes the person in the White House does have good expertise on the economy, and sometimes what you learn in textbooks is not super helpful. Now, when you think back to 22,018 for example, when there is that very public field between President Trump and chair Powell. Now, Trump won the lower rates. Fed was saying that they would hike rates and continue to hike rates in 2019 the end result of that was the equity market collapsing. And in January of 2019 the Fed making a tremendous U turn, basically admitting that, yes, they should have cut rates, and rates were too high. So I think having input from a wide range of stakeholders is a good thing to have. Definitely, we want to have independent monetary policy. We don’t want the president ordering the Fed to do anything, but I think having the elected government participating in discussions is not a bad idea.

[Simone Del Rosario]  

So we’re about a minute away, and we know that Powell is very timely. I’ll ask if we can get his podium shot up as we continue to talk here with just a minute left before we’re going to hear him speak for the first time since the election. So it’ll be very interesting to hear what he has to say before he does begin to speak, I just want to ask you to clarify this. Can Trump, demote him to Commissioner, and take him out of the chair and he just serves out the rest of his term as commissioner?

[Joseph Wang]  

So I don’t believe he can do that, but unless he has the unless Congress is also there with him as well. So I think if he could have done that, he would have done that his first term,