JPMorgan analyst David Kelly predicts that a Trump victory in the U.S. presidential election could lead the Federal Reserve to pause its rate-cutting cycle. Kelly anticipates that Trump’s expansionary fiscal policies would increase inflation and widen the fiscal deficit, leading to higher interest rates.
According to Kelly, the potential policies under Trump, including proposed tariffs and immigration crackdowns, could result in significant federal spending, thereby exacerbating the federal budget deficit. He suggests that these conditions would likely prompt the Federal Reserve to reconsider its approach to easing monetary policy.
Kelly expects that, regardless of the election's outcome, the Fed is likely to cut interest rates by 25 basis points during its upcoming meeting. However, the fiscal policy direction under Trump, if expansionary, might force the Fed to oppose further expansion and to slow down its easing policy.
If Kamala Harris were to win, Kelly foresees a different scenario where the economy might continue on a path of gradual, long-term stabilization with less noticeable changes. In such a case, the Fed would likely maintain its projected policy easing path.
Despite the Fed's operational independence, Kelly acknowledges that political factors inevitably influence economic conditions, which, in turn, affect the Fed's decisions. He notes that the Fed would react to, rather than dictate, federal government's fiscal measures.
JPMorgan’s analysis suggests that the Fed will proceed with a 25 basis point rate cut, aligning with its previously published forecasts, unless there is a significant surge in inflation. The outlook includes further rate reductions by year-end and additional easing by 2025.
Market risks warrant caution, and investment decisions should account for individual objectives and financial circumstances, as opinions expressed are not personalized financial advice.
