As Fed prepares to cut rates this week, all eyes are on outcome of Trump-Xi meeting in Seoul

The US Federal Reserve is likely to cut interest rates at the end of its next meeting on Wednesday (Oct 29), bringing out the policy bazooka for the second time since September even though it could signal that it’s almost time to hold fire again.

Wall Street economists say the central bank is all but certain to reduce the benchmark Fed funds rate to a range of between 3.75 per cent and 4 per cent, but most view the rate decision for December as a much closer call.

Some senior Fed officials – including Christopher Waller, the governor recently appointed by US President Donald Trump and who some say could succeed Jerome Powell as chairman – have argued for a series of aggressive cuts, saying tariff-driven inflation risks are overstated.

But Powell and other key members of the Fed’s rate-setting committee are not convinced that tariffs have worked their way through the system. Indeed, the data suggests that inflation has reared its ugly head again.

The consumer price inflation index rose 3 per cent on an annual basis in September. Even if it was softer than what many economists had forecast, the report clearly indicated an uptick in product prices.

Goods inflation hit its highest level since May 2023 in September, noted Bret Kenwell, an investment strategist at online brokerage eToro.

Crucial meeting

That’s why Trump’s visit to South Korea is so crucial to the December equation, a fact that Powell could note at his press conference this week. If goods inflation is being driven by tariffs, the prospect of a trade deal between the US and China – the world’s two largest economies – could well mean a more affordable holiday-shopping season for many Americans.

At the current tariff and interest-rate levels, inflation in the US will likely fall. But any flareups in the trade war – or between Trump and his Chinese counterpart Xi Jinping when they meet on Thursday – could change that picture dramatically.

Powell may also point out that the Fed itself would risk fanning the flames of inflation if it cut rates when prices were already elevated.

While Powell may welcome signs of easing trade tensions, he could also point to other reasons for proceeding with caution. The jobs market appears to be softening, but, if the ongoing government shutdown in the US continues, that could be hard to quantify.

There are also the valuations of the stock market. A growing chorus of naysayers, including the legendary short-seller James Chanos, are comparing the speculative excess in artificial-intelligence stocks with the dotcom bubble.

The sceptics point to some of the same irregularities that accompanied the dotcom boom, including many major investments by companies in infrastructure that could only be justified by unfeasible profit growth.

Private credit concerns

Finally, the central bank will have to address concerns about a boom in private credit that has triggered some warnings of hidden minefields in credit markets. Non-bank lending institutions have lent billions of dollars to corporations, circumventing some of the underwriting requirements – and transparency – of traditional banks making commercial loans. 

One niche where this approach was particularly popular was in the automobile business. The prices of cars in the US have slid since the Covid-19 pandemic boom, meaning that consumers have less incentive to repay outstanding loan amounts that are larger than the cost of replacement.

First Brands, one of the largest bankruptcies of a company backed by non-bank loans so far, was an auto-parts maker with about US$5 billion in annual sales.

Some traditional US banks also do business with private-credit companies, with some having warned of losses in this category. Powell may also be asked about the dangers of contagion spreading from the risky niche to the broader banking system.

Still, even as Powell manages expectations for future rate plans, he could sound optimistic notes on the US economy.

As long as wars – of the trade nature and otherwise – are in abeyance, economists said there is good reason to hope for increased prosperity in the US and elsewhere going into the holiday season.

“Despite concern in the short term, we remain optimistic about growth prospects next year based on the positive impact from rate cuts and the fiscal stimulus from Trump’s ‘One Big Beautiful Bill’,” said strategists at brokerage Jefferies.