The Federal Reserve faces a starkly different outlook for growth and inflation now that former President Donald Trump looks to have secured his return to the White House, only this time with the likely support of both Houses of Congress for his tax, spending and tariff plans.

The Fed, which kicks-off its two-day policy meeting later today in Washington, has committed to lowering the cost of borrowing, through its benchmark Fed Funds rate, now that inflation pressures have peaked and the job market is showing signs of weakness heading into the final months of the year.

Following an outsized half point rate cut in September, the first in more than a year, investors have effectively locked-in the odds of a quarter point reduction from the Fed on Thursday, a move that would lower the Fed Funds rate to between 4.25% and 4.5%.

However, traders are also paring bets on what the Fed might do at its final meeting in December, when it will publish fresh growth and inflation forecasts that will have to be, at least in part, influenced by Republican policies in the upcoming 119th Congress.

The CME Group's FedWatch tool now suggests a 70% chance of a December rate cut, down from 80% last month, and is pricing in a slower pace of reductions in the first quarter of 2025.

Trump has vowed to impose significant tariffs on imported goods as part of his overall economic agenda in a strategy he insists will add billions in revenue for the Treasury while offsetting the impact of the raft of tax cuts he has promised during the campaign.

He's also pledged to bring in Elon Musk as part of an as-yet-defined 'efficiency commission' that the Tesla CEO says could carve as much as $2 trillion from the next Federal budget.

New inflation concerns

The collective impact of those policies, of course, are likely to have significant implications for U.S. growth prospects, and are likely to stoke renewed inflation pressures in the world's biggest economy.

That concern is definitely being played out in the bond market, where benchmark 10-year Treasury note yields hit the highest levels since early July, and were last trading hands at 4.45%, following last night's vote.

The U.S. dollar index, meanwhile, was marked 1.4% higher against a basket of its global peers to trade at a fresh four-month peak of 104.847.

Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, thinks that even a modest 10% tariffs on imports would likely boost the Fed's preferred inflation gauge, the core PCE price index, by around 0.8 percentage points.