Why the Fed is Unlikely to Cut Rates Before the Election

Fed unlikely to cut rates before November election: our analysis

Federal Reserve Chair Jerome Powell confirmed on Wednesday that the central bank is pushing back its plans for rate cuts, citing a ‘lack of further progress’ toward hitting its inflation of goal of 2%.

“It is likely that gaining such greater confidence will take longer than previously expected,” Powell told reporters.

While the Fed hinted at the end of 2023 that it would start cutting rates this year, it now looks increasingly likely that the market will have to wait until after the November election, as the rate-setting committee meets two more times before election day: September 20-21 and November 1-2.

What the Fed decides to do at these two meetings could have seismic consequences, as a rate hike would most likely cause the stock market to fall, while a higher stock market would be more positive for the Democratic party.

According to Kathryn Rooney Vera, StoneX Chief Market Strategist, after July, rate cuts get too close to the election and the start of an eventual cutting cycle would be pushed to the December Fed meeting, or into 2025 if inflation prints do not allow.

Under the Fed’s asymmetric policy, preferring to err on the side of higher inflation, the bar is very high for additional rate hikes, particularly as the Fed is operating under the belief that current Fed funds rates are restrictive. If we see a re-acceleration in inflation, the Fed will likely stay pat at 5.25-5.5% for the foreseeable future.

What could the Fed do if the Republican Party wins the election?

What is little discussed is the potential for 2025 also to bring fewer cuts if the Republican Party regains the presidency in November. In an environment of a positive output gap in the US, a pro-growth and protectionist policy could keep the Fed on hold for longer.

The impact of prolonged positive real rates could be the stabilizing mechanism to slow economic growth in 2025. The risk of recession remains elevated over the medium term, specifically over the next 12-18 months.

This article is based on research by Kathryn Rooney Vera, StoneX Chief Market Strategist.

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