Newscasts - Market Insight: Trump tax policy and the impact on the Fed

First American Financial

07/11/2024 17:58

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Source: 'Reuters - Business videos'

Description: Treasury yields are trading near multi-month highs on a
combination of strong economic data and promises from Donald Trump to press
ahead with further tax cuts. with a potentially large increase in borrowing.
First American's Odeta Kushi explains why she thinks the Federal Reserve is
likely to keep cutting rates into 2025.
Short Link: https://refini.tv/4ejtbY3

Video Transcript:

What does a Donald Trump victory mean for the Fed's? Welcome to Market
Insight. I'm Peter Devlin. US Treasury yields dipped, but still remain at near
month to month high. Traders reflected on Donald Trump and Republicans
retaking the White House and the Senate. Prospect of more spending caused a
sudden spike in the yield on the 30-year Treasury, although yields across the
curve were already rising as the US economy continued to turnout strong
economic data ahead of today's Fed decision. So, what does this mean for rates
and the economy? So, let's ask Odeta Kushi Deputy Chief Economist at First
American. Welcome Odeta, thanks very much for joining us. So, let's start with
the Fed's, there is an expected cuts happening this evening. So, does the
Trump victory change the outlook for December?

It don’t likely that the victory and its own changes the outlook the Fed
is data dependent and so what will really determine the outlook for Fed
decision in December is incoming inflation, labor market, and economic data
between now and then. Right now, the markets pricing in a nearly 70% chance
that the Fed is on track to cut by 25 basis points in December.

So, let's take a closer look at today. And is there any chance we see a
surprise pause?

Right now, markets are expecting 99% probability that the Fed sticks to 25
basis points in today's meeting. You know we've seen some upward revisions in
economic data. The economy has been performing strong, but of course there is
some underlying weakness in the labor market and Chairman Powell did know in a
previous meeting that if the economy evolves as expected, we can expect
225-basis-point cuts for the remainder of the year.

Well, of course the rumour mill is churning and there is speculation that a
Trump administration may move to replace the head of the Fed. So, what would
that do for markets should it happen?

I think it's still speculative at this point. It's unclear what will happen,
but we do know that at least for the Fed politics does not enter the equation
right now it's all about data dependency.

So, let's look at the economy as a whole. It has been performing quite well.
So, on that basis alone, where do you see the neutral rates?

Probably a little bit higher. We have seen the Fed neutral rate in their
projections inch a little bit higher than it was in the past, but I still
think that the Fed is on track to continue on its rate cutting cycle through
2025 at this point.

So finally, 30-year mortgage rates have been creeping back up and not quite at
7% again though. So how is the housing market being impacted by all this?

Unfortunately, it looks like we're in a bit of a higher for longer mortgage
rate environment. We have that decline in mortgage rates preceding the
September FOMC meeting, which was welcome news for a housing market that's
really been struggling to gain any real momentum. But unfortunately, rates are
back up and that will be challenging for both potential buyers and potential
sellers, we know that higher mortgage rates have a dual impact on the housing
market, reducing affordability for those buyers and also keeping those sellers
rate locked into their homes. And so unfortunately, I think that it'll be a
headwind for the housing market.

Odeta Kushi, Deputy Chief Economist at First American, thank you very much for
your thoughts. And that's Market Insight