America's Battle Against Inflation Is Won – Just in Time for a Bigger Battle | US interest rates

There could be recriminations, protest marches and even social unrest on the streets of U.S. cities as Federal Reserve officials meet at their headquarters in Washington a day after the November 5 election of a new president.

The election of Kamala Harris could bring supporters of Donald Trump to the streets, while a win for Trump could spark widespread anger and condemnation among Democrats.

The Fed should behave as if it lives outside the political bubble, far from the daily jousting battles in Congress and the White House. An era-defining election will be harder to ignore.

Still, the Fed is expected to please whoever wins by cutting interest rates and announcing several more rate cuts after figures showed a two-year battle against inflation was largely won over the summer.

Markets currently expect Fed Chairman Jerome Powell to announce a 0.25 percentage point interest rate cut to a range between 4.5% and 4.75% at a news conference on November 7th.

Some Fed officials doubt that inflation has been permanently defeated. They fear companies will raise prices by more than the Fed's annual inflation target of 2% in response to a tight labor market that has kept wage increases steady despite falling inflation.

However, the latest labor market data showed that the unemployment rate rose from 3.4% to 4.1% over the past 18 months, after reaching 4.3% in July.

Friday's closely watched nonfarm payrolls report showed the U.S. economy added just 12,000 jobs in October. That was well below expectations of 113,000. There were special factors at play – the impact of Hurricanes Helene and Milton both impacted the month, and a strike at Boeing also had an impact. Nevertheless, analysts were aware of these factors when making their forecasts.

Given the weak data, a larger reduction in borrowing costs of 0.5 percentage points is possible. A larger cut would be welcomed by most U.S. workers, whose wage increases have not yet reversed the noticeable decline in living standards.

British workers are also under pressure and are looking forward to a rate cut by the Bank of England to reduce mortgage and rental costs.

Policymakers at the bank's Threadneedle Street headquarters will also meet on November 6th and will deliver their verdict on November 7th, as will Fed officials.

There is a strong chance the bank will cut interest rates after Governor Andrew Bailey said so Guardian that things could become a little more “aggressive” if inflation cools down further. That was before the latest official figures showed that UK inflation fell to 1.7% in September – below the Bank's target of 2% and the lowest level in three and a half years.

The bank will have a big advantage over the Fed, and that has to do with the political background of its decisions.

While the Fed will remain in the dark about the new president's tax and spending policies, last week's Labor budget gives the bank a good overview of the government's finances five years from now.

Through some measures, the budget limits government spending and gives Bailey and his colleagues room to cut interest rates more quickly. The only countercurrent comes from capital spending, which Rachel Reeves said would increase significantly following the easing of government lending rules.

A growth spurt could put pressure on prices if it leads to an increase in demand for skilled workers and those workers demand higher wages in a bidding war between employers. This scenario could mean that the bank believes interest rates need to stay higher for longer.

But investment is likely to rise only slowly, no matter what ministers say about the urgency – inflation remains low, wages are rising only moderately and interest rates remain on a downward path.

It follows that these two economies on either side of the Atlantic should be neither too hot nor too cold in a year, having regained balance after a confusing period of soaring inflation.

The only blemish on the landscape is the US election, which could undo this careful choreography. A disputed result or a Trump victory is likely to send markets into a tailspin and derail any return to anything resembling normality.