US Fed Hints at Pause in Rate Cuts as Trump Showdown Looms

Markets rally, but uncertainty over leadership and inflation remains

Federal Reserve Holds Back on Further Rate Cuts

The US Federal Reserve has trimmed its benchmark interest rate to 3.6%—its lowest in nearly three years—but signalled a cautious pause moving forward. While this marks the third consecutive cut, Fed officials now expect only one further rate reduction in 2026, a stance likely to frustrate the White House.

Despite recent weakness in the US jobs market, three members of the Federal Open Market Committee (FOMC) voted against any change, reflecting growing division within the central bank.

Why the Fed Is Pausing

Several key factors have influenced the Fed’s more cautious outlook:

• Improving economic growth is forecast for 2026.
• Unemployment is expected to fall significantly next year.
• Inflation is projected to ease from 3% to 2.4% as the effects of earlier trade tariffs fade.

Fed Chair Jay Powell commented,

“Having reduced our policy rate by 75 basis points since September, the Fed funds rate is now within a broad range of neutral estimates. We are well-positioned to wait and see how the economy evolves.”

Trump’s Influence and the Fed’s Independence in Question

President Donald Trump’s influence over the Fed is now a major talking point on Wall Street. With Jay Powell set to step down in May 2026, speculation is mounting that Trump may appoint a successor who strongly supports more aggressive interest rate cuts—undermining the Fed’s current guidance.

Market experts are warning of a potential politicisation of monetary policy, with concerns that the next Fed chair could abandon inflation control in favour of short-term economic growth.

“The appointment of a dovish chair and rising political interference would damage the Fed’s independence,” warned Danni Hewson, head of financial analysis at AJ Bell.

Market Reactions: Stocks Rise, Bonds Uneasy

While bond markets remained relatively flat following the announcement, US equities surged. The Dow Jones Industrial Average rose over 1.2%, buoyed by the Fed’s stronger growth outlook.

However, bond traders are increasingly jittery:

• Short-term bond yields may fall if cuts resume.
• Long-term Treasury yields are rising, now nearing 5% on 20-year bonds.
• Investors are balancing the "sugar rush" of short-term stimulus with fears of long-term inflation and a widening US budget deficit.

Impact on Investors and the Global Economy

For investors, the Fed's policy shift creates both opportunities and risks:

• Equities may continue to rally in the short term.
• Fixed-income markets face volatility if inflation expectations climb.
• Currency markets may see further pressure on the US dollar if dovish policy dominates.

Global markets are watching closely, especially given the uncertainty around the Fed’s next leader. A more politicised central bank could undermine global confidence in US monetary policy.

What Happens Next?

With only one rate cut forecast in 2026 and a new Fed chair on the horizon, the coming months will be pivotal. If President Trump appoints a pro-growth candidate, markets could see further volatility in bonds, inflation expectations, and the dollar.

Analysts say investors should prepare for greater policy unpredictability in the run-up to the next presidential election and potential changes in Fed leadership.

Key Takeaways for Investors

• Fed cuts rate to 3.6%, but signals a pause.
• Inflation and employment data will guide future decisions.
• Trump’s upcoming Fed nomination could change direction.
• Stocks benefit in short term, but bond market remains wary.
• Investors should brace for a more volatile 2026.

Sources: (SKY.com, BBC.com)