Fed’s decision to continue rate cut cycle may depend on outcome of US election: Experts

ISTANBUL

The Fed’s decision to continue its rate cut cycle may depend on the results of Tuesday’s US presidential elections, and experts believe that the bank may continue rate cuts in case of a victory by Vice President Kamala Harris, but the cycle may be at risk if former President Donald Trump is the winner.

Felix Schmidt, senior economist at German private bank Berenberg, told Anadolu that the Federal Reserve could possibly settle for a 25-basis point rate cut on Thursday, two days after the elections, due to the well-performing US economy in the face of tight monetary policy and stubborn inflation.

Schmidt said that whether rate cuts will continue may largely depend on the outcome of the elections, and in a potential Trump win, tax cuts could stimulate the economy initially, though additional tariffs and stricter immigration policies could lead to higher inflation.

“This would likely force the Fed to end its rate-cutting cycle sooner than otherwise,” he said.

Philip Marey, senior US strategist at Netherlands-based Rabobank, told Anadolu that the Fed is likely to issue 25-basis point rate cuts at its November, December, and January meetings.

“Beyond January, our Fed forecasts are dependent on the outcome of the presidential election. If Trump becomes president, which is still our baseline scenario, we will likely see a rebound in inflation once he imposes a universal tariff. For the Fed, this will mean that they will have to pause the cutting cycle,” he said.

“In contrast, if Harris wins, there will be no universal tariff, so we are likely to see less inflation than under Trump. This makes it more likely that the Fed can continue with its cutting cycle,” he added.

James Knightley, chief international economist at Dutch ING banking firm, told Anadolu that the Fed is likely to cut its interest rate by 25 basis points in November regardless of the election outcome, as inflation has become a less of a concern and the bank is focused on the job market, which is cooling down.

Knightley stated that a 25-basis point cut is broadly expected in the money markets as Fed Chairman Jerome Powell’s statements on the current economic environment and how the next president will influence the outlook will be of “huge significance.”

“Markets have appeared increasingly confident of a Donald Trump victory with equities, the dollar and Treasury yields all rising in recent weeks – if Trump wins, these trends may continue,” he said.

Knightly said he expects the Fed to bring the total easing to 100 basis points in 2024.

“A Trump victory will ensure a lower tax environment that should boost sentiment and spending in the near-term; however, promised tariffs, immigration controls and higher borrowing costs will increasingly become headwinds through his presidential term,” he said.

“We are suggesting that we may get to 3.5% Fed funds by the summer if Trump becomes president, but we may see the Fed go a little deeper and cut to 3% in the second half of 2025 under a Harris presidency,” he added.

*Writing by Emir Yildirim