The Fed's Next Step: Trump's Influence Far Greater Than Powell's

The prospect of Trump returning to the White House is becoming clearer, and the future interest rate path of the Federal Reserve may face changes.

According to the latest research report released by Bank of America Merrill Lynch, the outcome of the U.S. election may have a far greater impact on the future policy path of the Federal Reserve than the statements made by Federal Reserve Chairman Jerome Powell at monetary policy press conferences.

On Tuesday local time, Bank of America Merrill Lynch analysts Aditya Bhave and Shruti Mishra released a report stating that although the market is generally focused on Powell's remarks regarding the economic outlook and monetary policy, the new president's adjustments to fiscal policy will directly influence the Federal Reserve's decisions.

The two analysts wrote in the report:

In our view, the impact of the election on the Federal Reserve's policy path will be more profound than any comments made by Chairman Powell at the press conference.

The report further explains that if Trump takes office and implements fiscal expansion, the Federal Reserve may raise its expectations for the neutral interest rate. Additionally, if the new president significantly increases tariffs, the Federal Reserve may pause interest rate cuts due to concerns about the impact on inflation and economic growth.

As of November 6 local time, the counting of votes in the U.S. presidential election is still ongoing. According to CCTV News, U.S. media estimates that Trump has won the key "swing state" of Pennsylvania, just 4 votes away from victory.

November rate cut is almost a certainty, focus on Powell's remarks about the election

The Federal Reserve's next interest rate decision will be announced at 12:00 AM Beijing time on November 8. The market widely expects the Federal Reserve to cut rates by 25 basis points, lowering the federal funds rate to a range of 4.5%-4.75%.

Bank of America Merrill Lynch pointed out that the weak non-farm payroll report in October is sufficient for the Federal Reserve to cut rates by 25 basis points in November and again by 25 basis points in December.

The report mentions that although Powell may emphasize the stability of the economy and the return to inflation targets at this meeting, the market should pay more attention to the impact of the election results on fiscal policy. Bank of America Merrill Lynch believes that changes in fiscal policy will directly affect the Federal Reserve's monetary policy, especially in the current economic environment.

At the subsequent press conference, Powell may be asked about election issues, but Bank of America Merrill Lynch expects him to emphasize that the Federal Reserve will uphold its responsibilities and respond to upcoming data rather than comment on the policy agenda of the next administration.

This indicates that while the election results have a significant impact on Federal Reserve policy, the Federal Reserve will still claim to maintain its independence and will not directly comment on the political agenda.

If tariffs are significantly increased, the Federal Reserve will be more cautious

The report also mentioned the uncertainty of tariff policies and their impact on Federal Reserve policy.

Bank of America Merrill Lynch pointed out that the Federal Reserve's response to tariffs is difficult to determine, as they may overlook the impact of tariffs on inflation, viewing them as temporary price fluctuations while focusing on negative growth consequences.

However, considering that the Federal Reserve misjudged the impact of supply shocks in 2021, believing their effect on inflation was "transitory," in the face of significant tariff increases by the government, the Federal Reserve may be more cautious and consider pausing the interest rate cut cycle. Coincidentally, Morgan Stanley previously warned that if Trump wins on Wednesday, the Federal Reserve may pause its easing cycle as early as December, and the bank expects a 25 basis point rate cut in November