How Trump’s Economic Policies and Federal Reserve Decisions Could Strengthen the U.S. Dollar
After Donald Trump's victory in the U.S. presidential election, expectations for the Federal Reserve to continue rapid rate cuts significantly declined. Currently, markets anticipate that the Fed will lower interest rates by 25 basis points to 4.75% during Thursday’s meeting. Additionally, the probability of another rate cut in December has decreased from 88% to 70% due to market concerns that Trump’s policies could prevent inflation from slowing further, and may even lead to a potential rise in prices due to expected tariffs.
The Fed will announce its interest rate decision and statement on Thursday evening at 7:00 PM GMT, followed by Jerome Powell’s press conference at 7:30 PM GMT to address journalists' questions.
In general, a rate cut is beneficial for economic growth, reducing mortgage rates, and lowering corporate borrowing costs, encouraging companies to borrow and expand. It also stimulates household spending, with a more immediate and direct impact compared to the potential effects of Trump’s policies over the coming months.
The Fed previously lowered rates by 50 basis points in September, from 5.50% to 5.00%, marking the first rate cut in four years from its highest level in 23 years.
According to economic forecasts, Fed members signaled further cuts of 50 basis points in 2025 and an additional 50 basis points in 2026, bringing rates to 3%, as confidence grows in the sustained slowdown of inflation toward the 2% target.
On the inflation front, the U.S. Consumer Price Index (CPI) rose slightly more than expected in September due to higher food costs, but the annual inflation increase was the slowest in over 3.5 years. The CPI increased by 0.2% in September after a similar gain in August. Over the 12 months through September, the CPI rose 2.4%, the slowest annual pace since February 2021, compared to a 2.5% increase in August.
Excluding the more volatile food and energy components, core CPI rose by 0.3% in September, maintaining stability in inflation. Year-over-year, core CPI increased by 3.3% after a 3.2% rise in August.
Regarding economic growth, the U.S. economy grew strongly in the third quarter, with consumer spending rising at its fastest pace in a year and a half, while inflation slowed sharply. This reduced expectations of an economic recession, with U.S. GDP expanding at an annualized rate of 2.8% in Q3, following a 3% growth rate from April to June.
As for unemployment, U.S. hiring advanced at its slowest pace since 2020 in October, affected by severe hurricanes and strikes. Nonfarm payrolls increased by just 12,000 last month, the smallest gain since December 2020. Additionally, the U.S. economy added 112,000 fewer jobs in August and September than previously reported.
Recent statistics revealed that 512,000 people were unable to work in October, a record for this month. Approximately 1.4 million people who normally work full-time could only work part-time due to weather conditions, the highest level ever for October, compared to 129,000 last year.
The unemployment rate stood at 4.1%, with hourly earnings remaining strong in October 2024. Notably, the rise in the U.S. unemployment rate to 4.3% in July from 3.8% in March 2024 was one of the factors that prompted the Fed to cut rates by 50 basis points in September.
Regarding the trade deficit, the U.S. trade gap surged to a nearly two-and-a-half-year high in September, driven by robust domestic demand and expectations of higher tariffs on imports. The trade deficit increased by 19.2% to $84.4 billion, the highest level since April 2022, up from $70.8 billion in August, partly due to a decline in exports.
Food imports hit a record high at $18.8 billion, while capital goods imports also reached an all-time high, with an increase of $2.8 billion. Goods imports rose by 4% to $285.0 billion, the highest since March 2022.
Looking ahead, Republican candidate Donald Trump has pledged to impose tariffs of 60% on Chinese goods and 10-20% on all other imports. This potential scenario could accelerate the pace of imports if businesses choose to stockpile before any potential tariff increases in the event of a second Trump presidency, adding upward pressure on import levels.
Since 1950, U.S. interest rates have been significantly influenced by the economic policies of each Republican administration. Generally, the Republican Party tends to adopt economic policies aimed at stimulating growth by reducing taxes and minimizing government intervention in markets. Although the Fed has direct control over interest rates, the economic policies of Republican administrations can influence the Fed’s rate direction.
Below is an overview of U.S. interest rate trends during some prominent Republican administrations since 1950:
- Dwight Eisenhower (1953-1961): Eisenhower's period saw interest rate fluctuations, with relatively low inflation rates allowing the Fed to maintain lower interest rates to support post-WWII growth.
- Richard Nixon (1969-1974): Nixon’s era saw significant rate hikes to combat rising inflation, including ending the dollar-gold standard in 1971, leading to economic volatility and higher inflation.
- Ronald Reagan (1981-1989): In the early 1980s, Fed Chair Paul Volcker raised rates substantially to fight inflation, with Reagan supporting these policies. This initially led to a recession but subsequently achieved economic recovery.
- George H.W. Bush (1989-1993): Faced with a recession in the early 1990s, the Fed lowered rates to stimulate the economy during Bush’s term.
- George W. Bush (2001-2009): His administration saw significant rate cuts in the early 2000s post-9/11, followed by gradual increases to combat inflation, until the 2008 financial crisis, which prompted near-zero rates.
- Donald Trump (2017-2021): During Trump's term, the Fed raised rates gradually due to economic recovery, but sharply lowered them to near-zero levels during the COVID-19 pandemic to support the economy.
The U.S. dollar is expected to strengthen under Trump’s administration due to robust economic policies supporting domestic growth and enhancing the dollar’s appeal. Historically, Trump’s administration favored imposing high tariffs on imports, particularly from China, potentially increasing demand for U.S. products, reducing the trade deficit, and strengthening the dollar. Additionally, tax stimulus and deregulation policies may boost economic growth, building investor confidence in the U.S. economy and encouraging investment in dollar-denominated assets. This could lead the Fed to maintain relatively high interest rates, further supporting the dollar’s strength.
