The U.S. Federal Reserve will almost certainly keep cutting the base federal funds rate. They will likely do so not only this week, but also at their meeting in December. This is because short-term U.S. interest rates will likely be lower on Inauguration Day in 2025 than they were on Election Day.
This guess is not based on any predictions about prices or changes in the job market. The reason for this is that short-term interest rates tend to stay in the same direction for at least a few months after the U.S. election. Since short-term rates are much lower now than they were at the start of the year, this pattern from the past says that they will be even lower on January 20, when the next president takes office.
It’s interesting to note that this trend stays the same whether the party currently in power wins reelection or the party running against them wins. Cynics say that the U.S. central bank plays politics in the months before Election Day, but this shows that the Fed is more independent when it comes to setting interest rates.
This is what I learned from looking at the TMUBMUSD03M 4.537% rate on 3-month U.S. Treasury bills since January 1954. The Fed has direct power over the federal funds rate, which is not the same as that rate. However, the T-Bill rate is very similar to the federal funds rate. The T-bill rate was my choice because it had more past data.
In all 17 presidential elections since 1954, I tracked the change in the T-bill rate from Election Day to Inauguration Day the following January, as well as the change in the rate from Election Day to that date. Most of the time, T-bill rates went in the same way from Election Day to the inauguration as they did from Election Day to the beginning of the year.
This connection is there whether interest rates are going up or down year-to-date, but it is bigger when rates are going down. This is mostly because the Federal Reserve lowers interest rates to avoid a recession. If that happens, it will have started lowering rates a long time before Election Day and will keep doing so afterward.
The usual change from Election Day to Inauguration Day is 0.84%. This year, like most years, the year-to-date interest rate trend was down on Election Day. This means that the T-bill rate will go up by 0.84% between now and January 20. In order for this to happen, the Fed would have to lower rates at both its meetings in November and December.
