An uncertain election outcome could even open the door for the central bank to cut interest rates more aggressively, some say
The Federal Reserve could steal the show this week.
Investors are anxious about the possibility that it could take days, or even weeks, for the results of this week’s U.S. presidential and congressional races to be known.
But Tuesday’s vote is hardly the only major market-moving event on the calendar. In fact, it’s quite possible that Federal Reserve Chairman Jerome Powell could steal the show when he steps up to the podium on Thursday to deliver his postmeeting press conference.
In a sense, the November Fed meeting could be a touch anticlimactic, especially compared with the drama that preceded the Fed’s jumbo interest-rate cut in September.
Traders see a 25 basis point cut to the Fed’s policy-rate target as a virtual certainty on Thursday, according to data from CME Group.
Few expect Powell to articulate any notable changes to the central bank’s plans for adjusting monetary policy. The central bank isn’t expected to release any new economic projections until December. And any discussion about other policy priorities like adjusting the pace of the central bank’s balance-sheet reduction would likely only be disclosed in the meeting minutes, which won’t be released until a few weeks afterward, according to J.P. Morgan’s Chief U.S. Economist Michael Feroli.
But by simply doing what is expected, the Fed could send a reassuring message to investors: despite a recent uptick in Treasury yields, interest rates are still expected to move lower. Even if the pace of their decline remains somewhat murky.
“Our view on the Fed is the sooner they can get themselves to whatever neutral is, the better,” said Jason Browne, president of Alexis Investment Partners, during an interview with MarketWatch. He was referring here to the “neutral” rate, which is the theoretical equilibrium rate at which level monetary policy is no longer restrictive or loose. Powell has said the Fed hopes to return its policy rate to neutral over time.
A delayed election result could even work in the Fed’s favor, Browne said, by potentially enabling it to lower borrowing costs even more aggressively while avoiding accusations of playing politics.
All else equal, lower interest rates should help boost both stocks and bond prices. The Fed’s two-day December policy meeting is expected to conclude on Dec.18.
Election uncertainty could lead to bigger cuts
Browne isn’t alone in expecting that the possibly chaotic aftermath of this week’s election could open the door to more aggressive rate cuts.
Philip Marey, a senior U.S. strategist at Rabobank, warned in a report shared with MarketWatch on Friday that there is a “modest risk” that market unrest triggered by the election could prompt the Fed to deliver a bigger cut — either on Thursday, or at an emergency meeting called sometime in the not-too-distant future.
“If markets spin out of control, the FOMC may opt for a 50 [basis point] cut as a circuit breaker,” he said.
December cut still not 100%, portfolio manager says
Jeffrey Rosenkranz, portfolio manger on the Shelton Tactical Credit Fund at Shelton Capital Management, said Friday’s October jobs report has helped rebut concerns that the Fed may have acted prematurely by cutting rates so aggressively in September.
That said, he isn’t 100% sold on the notion that two more 25 basis-point cuts are guaranteed before the end of the year, even as traders of interest-rate futures have come to expect such an outcome, according to CME Group data.
“Powell and company have been very consistent about being data dependent, and there is a lot more data between now and December,” Rosenkranz said during an interview with MarketWatch.
Aside from the typical platitudes about being data-dependent, it’s unlikely that Powell will offer any commitments, or even hints, about how quickly the central bank might move to cut rates from here on out, he said.
While Powell will almost certainly be asked about the election, or how the rise in Treasury yields might factor into their thinking, Rosenkranz expects that the Fed chief would most likely demur.
Control in Washington could influence Fed’s thinking
Regardless of who emerges victorious in Washington on Tuesday, the Fed will likely continue cutting rates.
But the outcome of next week’s election could influence how much, and how quickly, the central bank decides to lower borrowing costs going forward, according to Ed Mills, managing director and Washington policy analyst at Raymond James.
To be sure, the Fed doesn’t manage fiscal policy, as Powell likes to remind reporters during news conferences. Still, according to Mills, it is something the central bank needs to take into account, due to its ability to influence the economy.
Divided government would be the most straightforward outcome, allowing the central bank to carry on cutting rates much as it would have otherwise.
Where things would start to get complicated would be if either party ends up with unified control of both Congress and the White House.
In the unlikely scenario that Democrats secure control of the White House, House of Representatives and the Senate, the Fed would need to anticipate the economic impact of policies like corporate-tax hikes.
A Republican sweep would present even greater challenges, and another Trump presidency could also incentivize the Fed to move more slowly, even if Republicans can’t secure unified control of Congress.
“While I think that there could be a whole variety of outcomes and offsets, if you are the Federal Reserve, you have a lot more uncertainty regarding the fiscal path forward if Trump is elected, given what he has proposed on trade, immigration and deficits,” Mills said during an interview with MarketWatch.
Equity investors seem to be on edge ahead of the election. The S&P 500 fell for a second straight week on Friday, despite finishing higher on the day. The index closed 23.35 points higher, or 0.4%, at 5,728.80. The Dow Jones Industrial Average rose by 288.73 points, or 0.7%, to finish at 42,052.19.
The Nasdaq Composite, which booked the biggest weekly drop of the major U.S. stock-market gauges, rose by 144.77 points, or 0.8%, on Friday to finish at 18,239.92. Although it still booked a loss of 1.5% on the week.
The CBOE Volatility Index, better known as the VIX or Wall Street’s “fear gauge,” stood at 21.88, north of its long-term average around 20. A similar gauge for the bond market, known as the ICE BofA Move index, also hit a fresh high for 2024 north of 132 on Friday.
Outside of the Fed and the election, next week is relatively light on potentially market-moving news. The highlight of the U.S. economic data calendar will be the latest reading on the ISM service sector gauge. A slew of corporate earnings reports are expected, including results from CVS Health Corp., Moderna Inc., Duolingo Inc. and others.
Internationally, the Standing Committee of the National People’s Congress, China’s top lawmaking body, will meet for five days next week. Investors will be keeping an eye out to see if it delivers a hoped-for large spending package to help boost China’s slowing economy.
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