The Federal Reserve follows closely after the U.S. election, and the outlook for interest rate cuts becomes uncertain!

Investors are concerned that the results of the U.S. presidential and congressional elections this week may take days or even weeks to be revealed. However, Tuesday's voting is not the only significant event on the calendar that could impact the market. In fact, Federal Reserve Chairman Jerome Powell is likely to steal the spotlight during his press conference early Friday morning.

In a sense, the November Federal Reserve meeting may end up being somewhat anticlimactic, especially compared to the dramatic scenes before the Fed's significant rate cuts in September.

Data from the CME Group shows that traders believe it is almost a certainty that the Fed will lower its policy interest rate target by 25 basis points on Thursday.

Very few expect Powell to make any significant changes to the Fed's plans for adjusting monetary policy. The Fed will not release new economic forecasts until December.

Michael Feroli, Chief U.S. Economist at JP Morgan, stated that discussions regarding adjustments to the Fed's balance sheet reduction pace and other policy focuses may only be disclosed in the meeting minutes, which will be released weeks later.

However, as long as the Fed acts as expected, it can send a reassuring message to investors: despite the recent rise in U.S. Treasury yields, rates are still expected to decline, even if the pace of decline remains uncertain.

"Our view on the Fed's interest rate outlook is that the sooner they reach neutral levels, the better," said Jason Browne, President of Alexis Investment Partners, in an interview. Powell has previously indicated that the Fed aims to restore its policy rate to neutral levels over time.

Browne noted that a delayed election result could even be beneficial for the Fed, as it might allow them to lower borrowing costs more aggressively while avoiding accusations of playing politics.

All else being equal, lower rates should help boost stock and bond prices.

Election Uncertainty May Lead to More Aggressive Rate Cuts

Browne is not the only one who anticipates that the potential chaotic aftermath of this week's elections could open the door for more aggressive rate cuts.

Philip Marey, Senior U.S. Strategist at Rabobank, warned in a report last Friday that market turmoil triggered by the elections could prompt the Fed to implement larger rate cuts—either this week or at an emergency meeting in the near future.

"If the market goes out of control, the Federal Open Market Committee (FOMC) may choose to cut rates by 50 basis points as an emergency measure," he said.

December Rate Cuts Are Not a Certainty

Jeffrey Rosenkranz, Portfolio Manager of the Shelton Tactical Credit Fund under Shelton Capital Management, stated that last Friday's October employment report helped dispel concerns that the Fed's aggressive rate cuts in September may have been premature In other words, according to data from the Chicago Mercantile Exchange, he does not fully believe that there will definitely be two more 25 basis point rate cuts before the end of the year, even though rate futures traders have begun to anticipate such an outcome.

Rosenkranz stated in an interview, "Powell and his colleagues have consistently insisted on relying on data, and there is still a lot of data to come from now until December."

He said that aside from the typical clichés about relying on data, Powell is unlikely to make any commitments or even hints about how quickly the Federal Reserve might start cutting rates from now on.

While Powell will almost certainly be asked about the election or how the rise in U.S. Treasury yields might affect their thinking, Rosenkranz expects Powell will likely object.

The Power Struggle Between the White House and Congress May Affect the Fed's Outlook

Regardless of who wins the election on Tuesday, the Federal Reserve may continue to cut rates.

However, Ed Mills, Managing Director and Washington Policy Analyst at Raymond James, stated that the results of this week's election could influence the extent and pace of the Fed's rate cuts.

It is certain that, as Powell likes to remind reporters at press conferences, the Federal Reserve does not manage fiscal policy. Nevertheless, according to Mills, this is something the Fed needs to consider, as it could impact the economy.

A divided government would be the most direct outcome, allowing the Fed to continue cutting rates.

What could complicate matters is if either party ultimately controls both Congress and the White House at the same time.

In the unlikely event that the Democrats gain control of the White House, the House of Representatives, and the Senate, the Fed would need to predict the economic impact of policies such as corporate tax increases.

A significant victory for the Republicans would pose greater challenges; even if the Republicans cannot ensure unified control of Congress, simply Trump returning to the presidency could lead the Fed to slow down rate cuts.

Mills stated in an interview, "While I think there could be a variety of outcomes and offsetting effects, if you are the Fed, considering Trump's proposals on trade, immigration, and deficits, if Trump is elected, the uncertainty about the future fiscal path is much greater."