Republican Party candidate Donald Trump has won the US presidential election, according to preliminary vote counts, promising to ‘cure’ America, solve problems with illegal migration, lower taxes, and stop military conflicts. Trump’s return to the White House is able to change not only the economic situation in the country, but also affect the future policy of the Federal Reserve System.
Trump’s relationship with the Fed has always been complicated, with him previously stating that the US president should have influence over interest rates and monetary policy, repeatedly expressing dissatisfaction that the country’s executive branch does not have more influence over rates. The Fed’s latest decision to cut a key rate just weeks before the presidential election and by 50 basis points at once drew the ire of Trump, who did not rule out that it was done for political reasons.
Today, 6 November, marks the start of the Fed’s next two-day meeting. Futures tied to the federal funds rate suggest that many are expecting the US regulator to lower the rate by another 25 basis points.
What will the rate be? What will change with Trump’s victory in the presidential election? What should the US market be prepared for? Finam.ru looked into these and other questions together with experts.
Trump vs Powell
Donald Trump, who nominated Jerome Powell to head the Fed in 2017, has repeatedly criticised his actions, notably by demanding a key rate cut during the trade war with China. Powell was subsequently reappointed as Fed chairman in May 2022, and his term in the position now expires in 2026. Back in mid-July this year, the Financial Times reported that many investors fear that if Trump wins the election in 2024, he will try to remove the head of the Fed, whom Wall Street considers an effective leader. However, Trump himself has assured that he will not seek Powell’s departure, but will allow him to serve out his next term, especially if he sees him ‘doing the right things.’
According to JPMorgan Asset Management analyst David Kelly, Trump’s victory could lead to the Fed suspending its easing cycle as early as December. Trump’s plans for expansionary fiscal policy, he said, would spur inflation and keep rates from falling. Trump’s tariff proposals, including a high 60 per cent duty on Chinese imports, as well as his proposed anti-immigration measures, imply large amounts of federal spending that would worsen the federal budget deficit.
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Felix Schmidt, a senior economist at German private bank Berenberg, also said that if Trump wins, the US regulator may end its easing cycle earlier than expected. According to his estimates, the Fed will cut the rate by 25 bp on 7 November on the back of good macroeconomic indicators, but Trump’s victory will change the future picture. The expert notes that tax cuts may initially stimulate the economy, while additional tariffs and stricter immigration policies could lead to higher inflation, which is likely to force the Fed to end the rate-cutting cycle earlier than planned.
InvestFuture analysts, in turn, also say that Trump is likely to continue tax cuts and increase duties on goods from the European Union and China, which will accelerate inflation, and a rapid Fed rate cut is unlikely to happen in this case.
Olga Belenkaya, head of macroeconomic analysis at Finam FG, emphasises that Trump’s victory at all could mean probable attempts to influence the Fed’s monetary policy decisions. ‘According to the assessment of most Western experts, the consequences of these measures will be pro-inflationary in nature (higher tariffs, retaliatory measures of other countries in the framework of tariff wars, labour restrictions, softer fiscal policy) and contribute to a more significant expansion of budget deficits than would be the case with a Harris victory. For example, the non-profit organisation Committee for a Responsible Federal Budget projected that Trump’s programme would lead to an additional $7.5 trillion increase in the national debt, while Harris’s programme would be half that – just $3.5 trillion. If the Fed manages to resist political pressure and there is no crisis in the economy, most likely, it will have to soften the MPC more restrainedly to compensate for the impact of pro-inflationary fiscal, tariff and immigration policies,’ Belenkaya believes.
At the same time, Finam FG analyst Nikolay Dudchenko does not rule out that there may be some conflict between Trump and Powell. ‘In Trump’s last term, Powell still managed to keep his post, although he remained under serious pressure,’ the expert recalled.
As Bloomberg writes, Trump’s plans, which would put upward pressure on prices, will complicate the Fed’s job as officials seek to bring inflation down to the target 2% while protecting the labour market. During this delicate task, the central bank could come under uncomfortable political scrutiny if Trump follows his previous pattern of publicly attacking the Fed chairman.
At the same time, Gennady Fofanov, president of investment platform InvoiceCafe, notes that Donald Trump is indeed known for his criticism of the Fed, advocating precisely for easing the MPC. ‘His eventual victory could possibly lead to some pressure from the presidential administration, but the Fed is known for its autonomy and acts primarily on the basis of economic interests. Meanwhile, Trump’s victory is unlikely to influence the rate decision at the next meeting. Based on the U.S. macroeconomic picture, there are no prerequisites for a rate cut, and an increase is also an unlikely scenario, as the Fed, as a rule, starts these methods in the most extreme cases, and now the situation does not favour this step,’ the expert commented, answering Finam’s questions.
The Fed’s decision and Jerome Powell’s speech, according to Nikolay Dudchenko, certainly remains in the focus of the market. ‘In the current situation, the decision on the key rate gains even more weight for the markets. According to the Fed Watch Tool, there has been some reassessment of the chances of a rate cut – the chances have decreased. The probability of a rate cut, according to CME data, now stands at 97.5 per cent versus 99.5 per cent a day earlier’
Georgiy Timoshin, junior strategist at Freedom Finance Global, agrees with his colleague, noting that as the results of the presidential race are being summarised, the investment community’s gaze is increasingly falling on the upcoming meeting of the Open Market Committee. ‘Market participants have formed their views on future interest rate movements and are ironcladly confident of a 25bp cut in the key rate at the end of the meeting to the upper bound of 475bp. According to Fed Funds Rate futures (as of pre-market on 6 November), this outcome is 97.5% likely, with the remaining 2.5% coming from a flat rate scenario. Expectations for December also more likely point to continued easing of the MPC and another 25 bps rate cut (68.6% probability). (with a 68.6% probability) to the upper range of 450 bp, which indicates a 66.9% probability of two consecutive rate cuts by the end of this year – this scenario is also the basic expectation of Freedom Broker,’ the expert emphasised.
A new president – new records?
World stock markets reacted favourably to Donald Trump’s possible victory. Yesterday, the key US indices ended the day in a strong plus and today’s trading also started in the ‘green’ zone. According to Natalia Malykh, Head of Equity Analysis at Finam, the US stock market may continue to grow by inertia, but in general, US indices have already grown significantly (+33% for the S&P 500 for the year), and this rally has a lot of positive expectations. In the expert’s opinion, even profit taking on the facts is possible when approaching historical peaks, especially since in general we can expect a strengthening of geopolitical risks related to Ukraine and Taiwan. Moreover, as Malykh states, one should also not rule out conflicts in the US itself, as the Democrats will most likely not want to recognise Trump’s victory.
Among the potential beneficiaries, Olga Belenkaya singles out American producers who benefit from artificial maintenance of their competitiveness with foreign producers through import tariffs (e.g. steel production), as well as companies in the oil and gas and financial sectors, but in the long term, a faster increase in oil production by American companies may contribute to a decline in global oil prices. Renewable energy companies may be among the losers, according to Finam’s expert.
At the same time, Georgiy Timoshin says that Trump’s presidency could have a number of implications for the economy and the Fed. For example, tax cuts and tax relief, coupled with other fiscal stimulus, will strengthen economic growth in the medium term, according to the expert, which could support inflationary pressures and anchoring the Fed’s neutral rate at a higher level in the medium term. ‘Such an outcome could put pressure on Treasury bond prices at the far end of the curve and push 10-year treasury yields to 4.5-4.7 per cent and higher. A higher neutral rate and persistently higher yields at the middle and far end of the curve could create an unfavourable backdrop for a potential market revaluation – in particular, an overheated IT direction could be at risk. We note that the positive effect of a Trump presidency could be in banking and insurance, defence, oilfield services and pipelines, durables, and small and mid-cap equities. A negative effect may be felt in the green energy industry, certain industrial and IT companies due to the intensification of trade contradictions between the PRC and the US. By the end of 2024, we expect the S&P 500 at 5890 points, but we note that volatility in the markets is likely to persist,’ he emphasised.
At the same time, Gennady Fofanov believes that, in general, Trump’s victory for the stock market appears to be a short-term stimulus, especially for indices such as the S&P 500. ‘Let me remind you that during his first term, the policy of tax cuts and deregulation had a positive impact on the financial and energy sectors. Meanwhile, he has also created some pressure on markets due to aggressive ‘trade wars,’ and his pursuit of aggressively expanding tariff policies on imported goods may also cause uncertainty in international markets. Accordingly, it is not quite far-sighted to give forecasts for the S&P 500 index until the end of the year, as it depends more on the general macroeconomic state of the U.S. and the Fed’s measures to control inflation, so the main reaction may come just at the time after the Fed’s decision on the rate or after some specific actions of Trump’, – concluded the expert.
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