JPMorgan Chase: Trump's victory may prompt the Federal Reserve to pause interest rate cuts as early as December

David Kelly, Chief Global Strategist at JPMorgan Asset Management, stated that if Trump wins the U.S. election this week, the Federal Reserve may pause its easing cycle as early as December.

Kelly pointed out that Trump's expansionary fiscal policy plans would drive up inflation and prevent interest rates from falling.

In an interview, Kelly said, "If the Republicans achieve a significant victory with Trump's win, there will be more expansionary fiscal policies rolled out, which could trigger trade wars, widen the deficit, and lead to higher interest rates."

The universal tariffs proposed by Trump, along with measures to curb immigration, are widely believed to push inflation higher. These plans would involve significant federal spending, deepening the federal budget deficit.

Kelly believes that the impact of these policies will prompt the Federal Reserve to pause interest rate cuts.

"I think the Federal Reserve will consider the potential direction of fiscal policy. If fiscal policy looks like it will increase the deficit, increase fiscal stimulus, and increase inflation, Federal Reserve officials may feel that if fiscal policy is expansionary, they will have to respond and slow down the easing policy," Kelly said.

On the other hand, Kelly indicated that if Vice President Harris wins, the economy may continue on its path of a soft landing.

He said, "If the U.S. government heads towards division, say if Harris wins, then I think this slow, prolonged soft landing economy will continue, but it will be somewhat sluggish."

Kelly stated that in this scenario, the Federal Reserve may stick to its expected path of easing policy.

He said, "I think officials will stick to their dot plot until the economy tells them not to." He referred to the possibility of inflation rising again.

The Federal Reserve's dot plot shows the committee members' predictions for the interest rate path over the coming years, with the version updated in September suggesting another 50 basis points cut by the end of the year and further easing in 2025.

Although the Federal Reserve operates independently, Kelly noted that it will still respond to politics, as developments may determine the direction of the economy.

Kelly said, "Once officials have an understanding of what fiscal policy is going to do, I think that will have some impact on their decision-making. They won't try to tell the federal government what to do, but they will respond to what the federal government is doing or might do."

Therefore, he stated that the Federal Reserve will almost certainly cut rates by 25 basis points at the end of this week's policy meeting, even if the election occurs beforehand