Market Outlook

September 1, 2024

Will Powell Trump Trump And Harris At The Polls?

Mark your calendars folks! While the November 5 presidential election seems certain to be another nailbiter, a separate drama unfolds this month at the Federal Reserve. With three opportunities left to cut rates this year, the most pivotal confab is just around the corner. Not only would a September rate-cut be the first since the pandemic and the market meltdown of March 2020, it would be the first such reversal in monetary policy close to the November 5 presidential elections, with the second one day later.

Given this juxtaposition and the candidates’ contrasting views of economic policy (and propensity to point fingers when things go awry), the recent rise in unemployment and accompanying 23-year high in interest rates continues to make Chairman Powell political fodder. Partly for that tendency, Congress liberated the Fed from the Treasury (which the executive branch controls) in 1951. It did so to address the threat of hyper-inflation. In so doing, it sought to insulate the central bankers from politics. Moreover, their monetary directives were made quite clear: to strive for full employment and manage inflation. The Fed was also tasked to help oversee banks. In these ways the Fed controls the nation’s monetary policy. That’s in stark contrast to fiscal control (spending and taxation) which politicians haphazardly control.

All Eyes On Powell
In any event, while Main Street will be watching Mr. Trump and Ms. Harris with greater scrutiny over the next nine weeks, Wall Street is laser-focus on Mr. Powell’s every utterance.

With unemployment rising and employment growth having been wildly overstated, recession fears quickly gripped the market last month: stocks tumbled, while bond investors played the steadier hand. Notably, credit spreads didn’t widen much, meaning investors saw no reason to be paid a higher risk premium.

Fed Expectations
So what should we expect from Chairman Powell’s Fed this month and the rest of the year?

While its policies are mostly data-driven, Powell isn’t tone deaf to market sentiment or, for that matter, shifting political winds.

As to the latter, the Fed will be careful not to signal any recession risk ahead of the vote. To me, that suggests three quarter-point cuts this year. Though shy of the 100 bps the market seems to have priced in, some verbal hand-holding should quell the disappointed. Of course, a 50-bp cut this month is also possible, as that might be viewed as insurance against a hard landing.

With about half the country certain to dislike November’s election outcome, Powell’s past role as “calmer-in-chief” during the last stock- and credit-market meltdowns may prove beneficial should the need arise.

But if history is prologue, it’s worth reminding that stocks climbed a wall of worry during the last presidential transition: investors were fine with the executive and legislative branches sharing power. That may not be the case this time around. At least Jerome Powell is trusted among lawmakers and Wall Street. He’s the rare Washington insider whose steady hand served the country well during times of crisis. Both presidential candidates should be mindful of his counsel.

— John Bonnanzio