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.

Worth watching: The yield on the 10-year Treasury note jumped on Wednesday to its highest level since May. Volatility in the bond market is seen as a potential brake on Trump’s ambitions to bolster growth through tax cuts and other stimulus measures. Also, tomorrow’s Personal Consumption Expenditures index report should offer new clues on the path of inflation.

The Trump effect was felt at Powell’s news conference. He did not mention the president-elect by name, but Powell said that some Fed members had priced in the potential “policy uncertainty” from Washington that could create “inflation uncertainty.”

“The Fed is reacting to expectations that the second Trump administration’s policies boost growth, raise inflation and tighten the job market relative to what would have happened under the status quo,” Bill Adams, the chief economist for Comerica Bank, said in an investor note on Wednesday.

Here are other takeaways:

• The Fed lowered its benchmark rate to about 4.4 percent, down from roughly 5.3 percent at its peak over much of the past 18 months.

• Fed officials see rates at the end of 2025 edging down to about 3.9 percent — suggesting two rate cuts next year rather than the four they had forecast in September.

• Powell said inflation was the big reason for the new outlook. “For additional cuts, we’re going to be looking for further progress on inflation,” he said, adding that the Fed was “not going to settle” for inflation remaining above its 2 percent target.

Powell stressed that the economy was growing and remained the envy of the world. But that observation was hardly a comfort for some analysts. Given that, “I don’t know why the Fed cut,” said Jason Furman, the Harvard economist who has been a persistent critic of the Fed’s handling of inflation.

• In other central bank news, the Bank of Japan kept its benchmark rate unchanged, surprising some economists and sending the yen lower against the dollar. The Bank of England remained steady, too.

HERE’S WHAT’S HAPPENING

The Biden administration backs California’s efforts to promote electric vehicles. The Environmental Protection Agency on Wednesday endorsed proposed rules by the state that would ban the sale of new gas-powered cars there by 2035, and would impose strict emission limits. The agency’s decision allows California to move ahead, but the Trump administration is expected to challenge the program.

The Supreme Court throws TikTok a potential lifeline. The court said it would hear TikTok’s challenge to a law that could see the popular video platform banned in the United States. The arguments will be heard on Jan. 10, just days before the law is set to take effect. The fast-track timing is exceptional and could signal that the justices want to deal with the question of how to weigh the constitutional protection of free expression against the government’s assertions that TikTok is a threat to national security.

Health officials report the first severe human case of bird flu in the United States. Local health officials said the individual was experiencing a serious respiratory illness, though the virus, H5N1, cannot yet spread easily among people. Also, California has declared a state of emergency to slow its spread among the state’s dairy cattle population.

Shutdown showdown

First it was Elon Musk, then came Donald Trump. The president-elect hasn’t assumed office yet, but the two may have killed a stopgap spending bill to keep the federal government running, escalating the risk of a partial shutdown this weekend.

The interventions just two days before Friday’s funding-deal deadline sent a shock wave through Washington, and it hinted at a new era of disruptive policymaking even with Republicans set to take control of Congress.

Trump slammed a plan that had passed with bipartisan House support. The sprawling bill, which included $100 billion in aid for hurricanes and other disasters and a pay bump for members of Congress, was “foolish and “inept” and included too many concessions to Democrats, he said in a statement on Wednesday. “We should pass a streamlined spending bill,” he added, saying congressional Republicans should push for a temporary plan that includes raising the debt ceiling.

(Yes, there is an irony in criticizing higher spending while also calling for a higher debt ceiling; Trump would rather that it happens under President Biden.)

The intervention came after a similar ruckus from Musk. The tech mogul and Vivek Ramaswamy, his partner tasked with cutting government spending, repeatedly ordered lawmakers to kill the plan and threatened those who didn’t. “Any member of the House or Senate who votes for this outrageous spending bill deserves to be voted out in 2 years!” Musk fumed on X.

Congressional Republicans were forced into a humiliating retreat. Speaker Mike Johnson told Fox News hours earlier that the bill was suboptimal but necessary, and admitted to discussing the plan with Musk and Ramaswamy. His argument to them: He didn’t like the spending in the bill either, but its passage is needed for Trump to impose his agenda when he takes office. That argument didn’t win them over, and Johnson didn’t put the bill to a vote in the chamber.

The U-turn shows how Musk could help Trump blow up policymaking. The president-elect upended norms in his first term, issuing late-night social media diktats that set a tone, but that weren’t always followed by Trump himself. This latest showdown demonstrates that he’s willing to let Musk and a coterie of outside disrupters, many from Silicon Valley, help compel Republicans to bend to his whims. With Musk using X — and his money — as his megaphone, expect more disruption.

What next? Lawmakers have a midnight deadline before the weekend to reach a deal or some federal programs will stop, some federal workers will be furloughed, and payments will be suspended.

On Polymarket, the online prediction market, the likelihood of a government shutdown before the end of the year hit 51 percent on Thursday, up from 10 percent in less than a day.

The China conundrum

TikTok may have received a rare piece of good news from the Supreme Court on Wednesday, but it may only be a respite in the wider fight between the United States and China. Companies on both sides of the world are bracing as President-elect Donald Trump threatens new tariffs.

Some American companies are trying to show that they’re moving away from China. Analysts peppered executives with questions about their operations there on recent earnings calls. Companies including Ralph Lauren and Williams-Sonoma were at pains to point out that they had diversified supply chains to other countries, and would be able to cope with potential Round 2 of a trade war.

But challenges for international companies operating in China have been laid bare by General Motors. This month, the carmaker announced a $5 billion charge against its Chinese business. It’s a stunning reversal for a company that had challenged Volkswagen as a top seller there for decades. In the first 11 months of this year, G.M.’s sales in China have plunged 42.5 percent.

The auto sector offers a cautionary tale. Beijing allowed foreign carmakers into the country partly to help build its own car industry. But as Chinese rivals increased the quality and quantity of their output, G.M. fell behind.

China also set up the market to favor local players. The authorities limited or blocked government subsidies for foreign carmakers. Another strategic blow: Beijing’s long-term commitment to developing electric vehicles was a marked contrast to how Western governments approached the green transition.

Many foreign brands couldn’t keep up. “Everyone among the foreign automakers had a condescending, arrogant attitude toward the capability of the Chinese companies to embrace innovation,” Bill Russo, a former Chrysler executive, who is now a Shanghai-based auto consultant, told The Times’s Keith Bradsher.

Could Trump actually help the Chinese in the long term? His first presidency changed how Washington and many of its allies deal with Beijing. But Chinese companies didn’t stop innovating. “China had its Sputnik moment — his name was Donald Trump,” Jim McGregor, a business consultant who has spent decades in China, told The Times’s Tom Friedman in an Opinion piece.

But there is one American manufacturer who the Chinese “fear and respect,” Friedman writes: Elon Musk. That may be good news for Tesla.

THE SPEED READ

Deals

• “The Last-Ditch Efforts to Win Over Critics of the Nippon-U.S. Steel Deal” (WSJ)

• The German government effectively called on UniCredit, the Italian lender, to sell its 28 percent stake in Commerzbank amid worries that it would seek a full takeover. (Bloomberg)

Politics and policy

• “Trump Pledged to Cut Taxes for Expats. This Republican Wants to Make It a Reality.” (WSJ)

• Two board members of Epic Games resigned after the Justice Department raised concerns about them also serving as directors of Tencent, the Chinese tech giant. (Hollywood Reporter)

Best of the rest

• Nissan is scaling back diversity programs as it faces pressure from conservative social activists, such as Robby Starbuck. (Bloomberg)

• Why Marc Benioff is so enamored with — and worried about — A.I. He also says there’s “no deal on the table” to sell Time magazine. (The Information, Bloomberg)

• The mystery around the leaked advance manuscript of Pope Francis’ autobiography “bears uncanny similarities to an infamous publishing swindler’s modus operandi.” (Air Mail)

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