Although the US Federal Reserve refrained from surprising markets and trimmed the benchmark interest rate by 25 bps to 4.50 - 4.75 per cent on November 7, markets seemed disappointed by Chair Jerome Powell's tone, which suggested uncertainty about the future path of interest rates.
In the September meeting, the US Fed slashed the benchmark interest rate by 50 basis points to 4.75 per cent-5 per cent for the first time in four years, expressing confidence that inflation was consistently on track to come near the target level.
On November 7, US Fed policymakers underscored job market has generally eased while inflation continues to move towards the US central bank's two per cent target.
The Fed is expected to continue reducing rates through 2026, aiming to bring the benchmark rate to a range of 2.75 to 3.00 per cent.
However, much will depend on how growth and inflation dynamics unfold from this point and the impact of Donald Trump’s presidency on these factors.
Trump has publicly criticised Powell several times. In his first term, he even explored the possibility of firing him. Experts believe Trump's policies about aggressive tariffs and extending tax cuts could drive up inflation and long-term interest rates, potentially prompting the Fed to slow its pace of rate cuts.
Some experts underline that Trump’s return raises questions about the Fed’s freedom to decide monetary policy without political interference.
However, following the policy decision on November 7, Fed Chair Jerome Powell told the press that he would not resign if Trump requested it. He also dismissed any potential influence of the US presidential election outcome on the central bank’s near-term policy decisions.
With several legal and structural protections against interference by elected leaders, the Fed enjoys considerable autonomy. While removing Powell from his position could be a complex exercise for Trump, he may try to put his loyalists on the Fed's board to increase his influence on the central bank.
"Trump’s most direct way of increasing his influence at the central bank would be to install loyalists on its seven-member board of governors, particularly the chair. Powell’s term as chair expires in May 2026. His separate term as governor expires in January 2028. Most legal experts say he can’t be removed before the end of his term without cause," says a Wall Street Journal report.
Experts expect Powell to continue focusing on inflation and growth prints to decide on interest rate trajectory.
According to Akhil Mittal, Senior Fund Manager - Fixed Income at Tata Asset Management, the rate cut cycle in the US will be a function of their economic growth and unfolding inflation trajectory.
Mittal believes the Fed will also keep a close watch on fiscal policy.
"While macro indicators have been drivers of policy decisions, the Federal Reserve would also want to judge the impact of new policies on fiscal such that financial stability is not at risk," said Mittal.
Hitesh Jain, Strategist- Institutional Equities Research at YES Securities, underscored despite Trump’s preference for lower interest rates, the Federal Reserve may not implement substantial rate cuts in 2025, largely due to Trump’s expansionary fiscal policies and potential inflationary effects.
"Increased import tariffs and tighter immigration policies could drive inflation higher. Furthermore, heightened fiscal spending, such as tax cuts and increased investments in defence and border security, might expand the fiscal deficit, increasing the need for borrowing and pushing bond yields up. Although a 25bps rate cut in December seems certain, we expect the Fed to implement rate cuts of less than 100 basis points during 2025, lower than those projected in the Dot plot," said Jain.
Puneet Pal, the head of fixed income at PGIM India Mutual Fund, believes that the US Fed will continue to conduct its monetary policy in line with the US economy's growth and inflation dynamics and does not see any change in the US Fed’s monetary policy stance in the near term.
"The Fed is likely to assess the impact of the economic policies pursued by the incoming administration and only then, if warranted, affect any changes to its monetary policy. The US Fed Chairman, after the November 8 FOMC policy meeting, categorically stated that the US presidential election result would have no effects on the Fed’s decisions in the near term and that it was too early to know the timing or substance of any potential fiscal policy changes," said Pal.
The majority of experts expect the RBI to stay on pause in its December policy meeting, considering the current high inflation.
Mittal of Tata Asset Management believes the RBI may not go for a rate cut in December due to elevated inflation.
"We do not see rate easing in December policy. Inflation for the months of October and November is expected to remain elevated (close to the upper end of the band). If growth doesn’t show extraordinary weakness, RBI will likely hold the policy rates and wait for inflation to come towards the expected trajectory before easing. So, we believe RBI might have a small window to ease in February 2025; otherwise, we should most likely see a rate cut in April 2025," said Mittal.
Jain of YES Securities expects the RBI to implement a rate cut in February, provided there are no inflationary shocks from external factors like Oil. However, if consumer spending does not significantly improve in Q3 FY25 following a Q2 slowdown, this rate cut could happen as early as December.
"We believe the RBI will be reassured by expectations that food inflation will ease in the second half of the year due to higher agricultural output, while core inflation remains stable, reflecting the impact of previous monetary actions. That said, any rate cuts over the coming year will likely be shallow (50-75 basis points), as the RBI has informally signalled a preferred real interest rate range of 1.5-1.9 per cent," said Jain.
Pal of PGIM India Mutual Fund said RBI’s monetary policy decision will be driven by domestic growth and inflation dynamics. Given the current high food inflation, he does not expect any rate action in next month's MPC meeting.
"We expect RBI to start reducing the policy rates from February 2025, and we expect a slow and gradual rate-cutting cycle given that RBI is currently prioritising financial stability and is focussing on aligning Inflation durably to the medium-term target of 4 per cent," said Pal.
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