October 2024
With the distraction of the contentious Presidential campaign finally behind us, traders and investors have refocused on what policies the new President will pursue. The expectation had been that the final vote tally would take days, if not weeks to be announced. Instead, it was announced early the next morning that Donald Trump would be making a second appearance as POTUS. The capital markets have interpreted the results as good news, with S&P 500 index punching through 6,000 and the U.S. dollar reversing the swoon it had been in since May of this year. The irony is that the yield curve flattened, with short maturities rising in yield. The yield-to-maturity of the 2-year note has risen 75 basis points from the low despite the 75 basis points of overnight rate cuts in the last two months. Trump has vowed to energize the economy with the double edge sword of economic stimulus and regulatory rollback.
That’s going to pose a dilemma for the Fed as it’s expected that Trump is going to bully Chairman Powell to cut rates at a faster pace at a time when he’s attempting to accelerate economic growth. Typically, when economic growth accelerates, the Fed will act to slow expansion to avoid inflationary excesses. Our thought prior to the election had been that 200 basis-points of cuts by the end of 2025 was unlikely. With Trump seemingly handed a mandate to enact his policies, the Fed will defend their independence despite Trump leaning on Jay Powell. In fact, we suspect that a rate cut at the December 18th meeting is not a lock. Economic data has improved since the late summer downtick, and the recent equity market “moonshot” is likely to contribute to the wealth effect of consumer confidence at a time when their wallets are open for holiday shopping anyway.
The Federal Open Market Committee meeting concluded the day after the announcement of Trump’s victory. As was widely expected, the committee cut the overnight rate by 25 basis points, bringing the overnight band to 4.50% – 4.75%. The press conference was filled with the usual questions about the timing of the next move and the committee’s thoughts on inflation and unemployment. Eventually, midway through the Q&A Powell was asked if he would step down if Trump asked him to do so. His response was simply “no.” His term runs through May 2026, and we’d argue that he’s done a decent job and there seems no need to find a successor at this time.
The most recent Consumer Price Index (CPI) came in as expected, showing a 2.6% year-over-year increase. That’s above the 2% target communicated by the FOMC, and an uptick from the 2.4% recorded last month, but probably near enough for the committee to pause their rate cutting and let the dust settle, especially since the new administration seems certain to enact pro-growth strategies.
The Federal Reserve has for years said that they’ll be reactionary to economic data, with regard to the overnight interest rate. Their job just got more complicated as their Summary of Economic Projections will require them to anticipate what Trump wants from the economy, and the likelihood that Congress will willingly approve that policy. With the Republicans holding both houses, policy implementation is highly likely.
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