Washington and the Markets are Feeling the President-elect Effect

DealBook|Why the Specter of Trump Hangs Over the Fed, Congress and the Markets

Higher-for-longer is here

For weeks, Jay Powell has been sending markets the message that the Fed is entering a more cautious phase, signaling that high borrowing costs would linger for longer.

The central bank made good on that message on Wednesday, delivering a quarter-point rate cut that sent markets tumbling and the dollar soaring.

The hawkish shift is unlikely to have pleased President-elect Donald Trump and could weigh on his economic agenda as he prepares to take office next month.

The S&P 500 had its worst Fed-day sell-off since 2001. After the central bank announced the rate cut — but signaled fewer cuts over the next three years — the VIX index, Wall Street’s “fear gauge,” spiked. Investors dumped everything including their crypto holdings and bank and tech stocks, as the Fed made clear that inflation risks are back and that their 2025 economic outlook looks very different from the one it delivered just three months ago.

A partial federal government shutdown nail-biter (more on that below) is adding to jitters.

Stock futures point to a slight rebound on Thursday. But traders are penciling in just one rate cut next year (the Fed sees two), and some on Wall Street are rethinking their models. “We stick with our forecast for two more rate cuts next year, but the risks have clearly shifted in the direction of fewer (no) cuts,” Aditya Bhave, an economist at Bank of America, said in an investor note on Thursday.

Trump is set to take office next month against an economic backdrop that he often rails against. The prospect of high interest rates, a strong dollar and uncertainty in stocks and bonds could hang over his administration. Yet economists warn that many of his policies, including hiking tariffs and cutting immigration, might be inflationary.