Path Forward? “Well, It Depends …”

As of right now, there is nothing to model ahead of the new presidency, and the Fed will only start its analysis once new policy is announced and ultimately legislated. The election, therefore, will have “no effect” in the near term.

Prior to the election there was considerable uncertainty about the path forward, not only for interest rates, but for the economy as a whole. It seemed the whole world was watching for the outcome, which many experts thought would take weeks or possibly even months to finalize. As it turns out, the results were overwhelming and clear with the republican party sweeping the presidency, senate and house of representatives.

The Fed’s Federal Open Marketing Committee (FOMC) meeting occurred a day late (meetings are typically held on Wednesdays, but this session was pushed back by a day, a decision speculated to be because of the election). We just heard from Chair Jerome Powell, who infamously remains “data dependent.”

One thing, however, was quite clear: He would not comment on anything political. When asked if he thought the election results reflected Americans’ thoughts about the economy, he responded that he would not comment on the election. When asked if he thought his job was in jeopardy with the new administration, he flatly answered “no” (though he did clarify later that any demotion of the Fed Chair is not permitted by law). When asked another question centered around politics, he responded he was “not going to get into any of the political things here today.”

Another topic Powell refused comment on was fiscal policy. However, the Fed does extensively model what impact fiscal policy would have on monetary policy as a part of its decision-making process.

As of right now, there is nothing to model ahead of the new presidency, and the Fed will only start its analysis once new policy is announced and ultimately legislated. The election, therefore, will have “no effect” in the near term, and Powell implied it would take some time for legislation to take effect and laws to be implemented. He did comment that the “path is unsustainable” on fiscal policy and added that he is not the first Fed chair to comment as such.

Currently, the Statement of Economic Projections (SEP) has four 25 bp rate cuts estimated for 2025. Powell noted, “We are on a path to a more neutral” policy rate, but that the neutral rate is more elevated than had been previously thought (as evidenced by the changing Dot Plot).

At the time of this writing, the Fed Fund Futures rate is approximately 3.5% at the beginning of 2027. Powell was asked if he could rule out a rate hike next year and quickly replied that the Fed does not rule out anything, but that it was not in its plan. “We are not on any preset course,” he emphasized, saying the committee would continue to make decisions meeting by meeting. At this point in time, it does seem that the Fed is well positioned to deal with headwinds that may arise. The economy is expanding solidly, the labor market is more in balance, and inflation has eased – all of which have boosted confidence that inflation is headed toward the 2% target and that easing rates is the correct path. Now it must determine the pace of those rate cuts.

When asked about the “right” level of interest rates, Powell stated that he does not have anything to say about bond yields, though he did say that inflation expectations are in line with where it wants them to be while noting the 5Y5Y rate (a preferred measure of inflation expectations).

He commented that the 3-month average and 6-month average core Personal Consumption Expenditures readings are showing further progress towards the 2% goal, even if the 12-month average appears stuck. At this point, inflation is mostly coming from housing services (rent) in a form of “catch up” inflation, i.e. rents were frozen for a period of time and now are being increased at increased rates. The Fed is watching financial conditions and have noted that yields have risen over the past six weeks, but do not see anything that would indicate that financial conditions have tightened materially.

In a rare moment of levity, when asked about stagflation, the Chair responded that the plan is to avoid it! It is a very difficult problem, but based on the Fed’s current policy and what it is seeing in the data, it does not seem to be headed for this conundrum.

All told, in a highly anticipated election followed by a highly anticipated FOMC meeting, we come away with more of the same, and more “Well, it depends…”