Fed Watch - 'In the near term, the elections will have no effect'
The Fed cut its policy rate by 25bps, in line with expectations. The real question was however how the Fed would react to Donald Trump's election victory, and the proposed fiscal and tariff policies. Powell has of course said previously that he does not respond pre-emptively to policies before they've been implemented. The Fed's assessment could help, as the proposed policies of the upcoming Trump administration are reason to push for a more gradual rate-cut pace. But the Fed, as a rule, steers clear of making pronouncements on fiscal policy - with the typical refrain that this is Congress' job.
Chair Powell was indeed adamant, stating 'I'm not going to say anything that relates directly, or indirectly to the election.' But then he did. We got two important statements. First, on the question whether he would step down when asked to leave, the brief response was 'No.' He later added in response to a different question that it was not permitted under the law for the president to remove the Fed chair. Second, he stated that the elections will have no effect on Fed policy in the near term. He explained that the Fed would carefully assess and model fiscal policy changes as they are taking shape, and incorporate them into projections when finalized. But they are always just part of the model, and the overall trajectory of the economy, not individual fiscal policies, is what determines monetary policy. Finally he added, 'We don't guess, we don't speculate, and we don't assume.'
Powell was however also very careful not to give any guidance on the near term either. The story remains one of 'recalibration' in response to sufficient confidence that inflation is coming back sustainably to target, and a labor market that has softened, but is not yet weak. The goal is to keep it there, and the Fed is pursuing a data-dependent path, trying to go neither too slowly, unduly hurting the employment mandate, or too quickly, not reaching the inflation target sustainably. He gave some guidance on the expected shape of the path, in that the easing path would slow down when policy rates get near neutral, similar to how the latest hiking cycle slowed down once it neared its peak. It is clear that rates are still restrictive, and with inflation not yet sustainably at 2%, they still have to be. The policy rate is also still quite far removed from even high estimates of neutral, implying the Fed could continue its steady recalibration going forward.
Overall, we do not expect the two inflation reports and the labour market report that will be released between now and the next FOMC meeting will prevent the Fed from continuing its easing path, and expect the Fed will again cut by 25 bps. At the same time, the longer run is becoming increasingly uncertain, and we are working on an update to our view.