Fed megaphone: The era of ultra-low Interest Rate ends, Trump holds the key to rate cuts in 2025

The Fed cuts rates by 1 point this morning, but signals a slowdown in rate cuts next year. Nick Timiraos, a Wall Street Journal journalist known as the 'Fed megaphone,' wrote that the era of ultra-low Interest Rate may have come to an end. If the Fed believes the neutral Interest Rate has risen, it may stop cutting rates for a considerable period of time. President-elect Trump's trade and immigration policies will also influence the Fed's rate-cutting decisions. (Recap: Stocks and currencies plummet! Fed expected to cut rates by only 2 points next year, Tesla plunges 8%, US stocks plummet) (Background: BTC price drops below $100,000, Ether falls below $3650, Powell: Fed not allowed to hold BTC) The Federal Reserve announced this morning, as expected, a rate cut of 1 point, but hinted at a slower pace of rate cuts next year, cutting only 2 points instead of the expected 4 points in September. Fed Chairman Powell also stated that the neutral Interest Rate is approaching, and due to the slower rate cuts than expected by the market, major US stock indices plummeted at the close today, and the encryption currency market also experienced a nosedive. Nick Timiraos, known as the 'Fed megaphone,' wrote that how far the US is from the neutral Interest Rate will be a key issue in determining the Fed's future policy direction. The higher forecast for the neutral Interest Rate in the post-pandemic era also indicates the end of the ultra-low Interest Rate era. Can the era of ultra-low Interest Rate be reversed? The neutral Interest Rate refers to the level that can keep the economy at full employment and stable inflation. This level cannot be directly observed but needs to be inferred by economists and policymakers based on economic behavior. If borrowing and consumption are strong and price pressures rise, the current Interest Rate may be below the neutral Interest Rate. Conversely, if borrowing and consumption are weak, and inflation is declining, the Interest Rate may be higher than the neutral Interest Rate. The article points out that discussions on the neutral Interest Rate were not important earlier this year because the Interest Rate was at a level that was considered restraining by almost all Fed officials. However, with the Fed having cut rates by 1% and the economy appearing healthy, the issue of the neutral Interest Rate has become the focus. If it is believed that the neutral Interest Rate has risen, Fed officials may become more cautious in further rate cuts. Powell mentioned at the press conference on Wednesday: We cannot accurately know where the neutral Interest Rate is, but what we can be sure of is that we are now closer to it than before. From here, we are entering a new phase and will be cautious about further rate cuts. Timiraos stated that after the 2008 financial crisis, economists and Fed policymakers gradually lowered their estimates of the neutral Interest Rate. The ultra-low Interest Rate and massive monetary stimulus have not brought significant economic growth. Some economists believe that due to labor shrinkage caused by aging population and long-term lack of demand for new investments, low Interest Rates will become the norm. However, some economists believe that the massive fiscal stimulus during the pandemic has led to a new equilibrium in the economy, and the neutral Interest Rate has risen in the past few years. The Fed forecasts the long-term Interest Rate level every quarter, which is actually an estimate of the neutral Interest Rate. The median forecast has dropped from 4.25% in 2012 to 2.5% in 2019, and it is expected to remain at that level until 2023. But the forecast for the neutral Interest Rate has risen in each quarter this year, with the latest forecast on Wednesday being 3%, with 8 out of 19 officials estimating higher than 3%. Trump's policies influence rate-cutting decisions. The article mentions that the strong economy amid rising rates may only reflect temporary factors, such as increased immigration or businesses and households locking in low Interest Rate loans during the pandemic. However, over time, if the economy continues to rise, it may indicate that the neutral Interest Rate has entered a higher new normal. If officials conclude that the neutral Interest Rate has risen, the Fed may stop cutting rates for a considerable period of time. As officials try to determine the level of the neutral Interest Rate, President-elect Trump's promise to reform trade and immigration policies may make it more complex to determine the new normal of the economy. With inflation still above target, this is likely to further strengthen the Fed's cautious stance on rate cuts.