Market dynamics and Fed's role - Trump Re-Election
Recent polls and market predictions have fueled speculations of a potential re-election for former U.S. President Donald Trump, with investors eyeing so-called “Trump trades” — strategies that typically involve a stronger dollar, reduced interest rates, and a preference for U.S. stocks over international ones. While these investments appear to be gaining momentum, there are concerns among financial institutions that they may have already reached their peak, potentially limiting gains in the near future.
However, a significant factor adding complexity to this landscape is the role of the Fed and its influence on economic performance through its monetary policies. The Fed’s recent rate cuts, inflation control, and employment policies could have a decisive impact on both “Trump trades” and broader market stability.
The Fed’s Dual Mandate: Inflation Control and Full Employment
The U.S. Federal Reserve operates with a dual mandate: to maintain an annual inflation rate of 2% as measured by the Consumer Price Index and to sustain full employment, although it doesn’t set a specific target for the unemployment rate. When the CPI strays too far from the 2% goal, or if there are dramatic shifts in employment, the Fed adjusts the federal funds rate to influence economic conditions.
In 2022, the CPI hit a 40-year high of 8%, prompting a swift response from the Fed. Contributing factors included the trillions of dollars injected into the economy during 2020 and 2021 to offset the impact of the COVID-19 pandemic, near-zero interest rates, and quantitative easing measures that flooded the financial system with liquidity. In response, the Fed raised the federal funds rate to 5.33%, marking a two-decade high. This aggressive policy adjustment has since helped bring the CPI down to an annualized rate of 2.4% as of September 2024, aligning closer to the Fed’s target.
September Rate Cut and Market Expectations for November
In light of these trends, the Federal Open Market Committee at the Fed decided to cut the federal funds rate by half a percentage point in its September meeting. The upcoming FOMC meeting scheduled for early November raises the question of whether another rate cut could be imminent.
Given that inflation is trending toward the 2% target, a further rate cut seems likely. Moreover, with the unemployment rate climbing from 3.7% to 4.1% this year, there are signs of potential weakening in the job market, reinforcing the need for the Fed to support economic growth before further job losses occur. Chairman Jerome Powell has indicated that the downside risks to employment have increased, which might justify additional rate reductions.
According to the FOMC’s September projections, there could be another 50 basis points of cuts before year’s end. With only November and December meetings remaining, most predictions suggest two 25-basis-point cuts in each session. The CME Group’s FedWatch tool reflects a 95% probability of a 25-basis-point cut next week, with a 78% likelihood of a similar cut in December.
Impact of Rate Cuts on Trump Trades and Broader Markets
These potential rate cuts have mixed implications for "Trump trades." Lower interest rates can benefit U.S. stocks in the long run by reducing borrowing costs for businesses, boosting their capacity for growth, and increasing consumer spending power. This environment would likely favor sectors central to “Trump trades” — primarily energy, finance, and certain defensive industries — especially if Trump secures re-election.
On the other hand, if Harris wins, analysts anticipate a more balanced international investment landscape, which could weaken the dollar and shift investment attractiveness from U.S. to international stocks. Harris’s policies, expected to support environmentally friendly sectors and lessen trade tensions, may also benefit industries outside the U.S., including healthcare and manufacturing.
Long-Term Rate Cuts and Economic Growth Outlook
Looking beyond this year, the FOMC’s forecast indicates the possibility of an additional 125 basis points of cuts in 2025, with a final 25-basis-point cut in 2026. If realized, this would bring the federal funds rate to approximately 2.88%, nearly halving it from its recent peak. Historically, such reductions support stock markets, enhancing growth across various sectors by enabling corporations to expand with cheaper credit and improve profitability with lower interest costs.
Still, investors remain cautious. Rate cuts are favorable for stocks only when economic conditions are stable. If further unemployment spikes indicate deeper economic challenges, investors could pull back, particularly from “Trump trades,” opting for safer assets amid heightened uncertainty.
Preparing for Market Adjustments Based on Election Outcomes
As the November elections draw near, markets remain highly sensitive to both political forecasts and the Fed’s rate decisions. While “Trump trades” show ongoing upward momentum, the potential for an investment realignment looms based on the election outcome. Investors are preparing for scenarios under both Trump and Harris, each with profound implications for the U.S. and global economy. In either case, the Fed’s monetary policy — and its influence over inflation and employment — will be crucial in shaping the investment landscape for the coming years.
However, a significant factor adding complexity to this landscape is the role of the Fed and its influence on economic performance through its monetary policies. The Fed’s recent rate cuts, inflation control, and employment policies could have a decisive impact on both “Trump trades” and broader market stability.
The Fed’s Dual Mandate: Inflation Control and Full Employment
The U.S. Federal Reserve operates with a dual mandate: to maintain an annual inflation rate of 2% as measured by the Consumer Price Index and to sustain full employment, although it doesn’t set a specific target for the unemployment rate. When the CPI strays too far from the 2% goal, or if there are dramatic shifts in employment, the Fed adjusts the federal funds rate to influence economic conditions.
In 2022, the CPI hit a 40-year high of 8%, prompting a swift response from the Fed. Contributing factors included the trillions of dollars injected into the economy during 2020 and 2021 to offset the impact of the COVID-19 pandemic, near-zero interest rates, and quantitative easing measures that flooded the financial system with liquidity. In response, the Fed raised the federal funds rate to 5.33%, marking a two-decade high. This aggressive policy adjustment has since helped bring the CPI down to an annualized rate of 2.4% as of September 2024, aligning closer to the Fed’s target.
September Rate Cut and Market Expectations for November
In light of these trends, the Federal Open Market Committee at the Fed decided to cut the federal funds rate by half a percentage point in its September meeting. The upcoming FOMC meeting scheduled for early November raises the question of whether another rate cut could be imminent.
Given that inflation is trending toward the 2% target, a further rate cut seems likely. Moreover, with the unemployment rate climbing from 3.7% to 4.1% this year, there are signs of potential weakening in the job market, reinforcing the need for the Fed to support economic growth before further job losses occur. Chairman Jerome Powell has indicated that the downside risks to employment have increased, which might justify additional rate reductions.
According to the FOMC’s September projections, there could be another 50 basis points of cuts before year’s end. With only November and December meetings remaining, most predictions suggest two 25-basis-point cuts in each session. The CME Group’s FedWatch tool reflects a 95% probability of a 25-basis-point cut next week, with a 78% likelihood of a similar cut in December.
Impact of Rate Cuts on Trump Trades and Broader Markets
These potential rate cuts have mixed implications for "Trump trades." Lower interest rates can benefit U.S. stocks in the long run by reducing borrowing costs for businesses, boosting their capacity for growth, and increasing consumer spending power. This environment would likely favor sectors central to “Trump trades” — primarily energy, finance, and certain defensive industries — especially if Trump secures re-election.
On the other hand, if Harris wins, analysts anticipate a more balanced international investment landscape, which could weaken the dollar and shift investment attractiveness from U.S. to international stocks. Harris’s policies, expected to support environmentally friendly sectors and lessen trade tensions, may also benefit industries outside the U.S., including healthcare and manufacturing.
Long-Term Rate Cuts and Economic Growth Outlook
Looking beyond this year, the FOMC’s forecast indicates the possibility of an additional 125 basis points of cuts in 2025, with a final 25-basis-point cut in 2026. If realized, this would bring the federal funds rate to approximately 2.88%, nearly halving it from its recent peak. Historically, such reductions support stock markets, enhancing growth across various sectors by enabling corporations to expand with cheaper credit and improve profitability with lower interest costs.
Still, investors remain cautious. Rate cuts are favorable for stocks only when economic conditions are stable. If further unemployment spikes indicate deeper economic challenges, investors could pull back, particularly from “Trump trades,” opting for safer assets amid heightened uncertainty.
Preparing for Market Adjustments Based on Election Outcomes
As the November elections draw near, markets remain highly sensitive to both political forecasts and the Fed’s rate decisions. While “Trump trades” show ongoing upward momentum, the potential for an investment realignment looms based on the election outcome. Investors are preparing for scenarios under both Trump and Harris, each with profound implications for the U.S. and global economy. In either case, the Fed’s monetary policy — and its influence over inflation and employment — will be crucial in shaping the investment landscape for the coming years.
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