Global markets are focused on a specific date: the meeting of the Federal Open Market Committee (FOMC) of the Federal Reserve on November 7. It will be known whether the pace of rate cuts that will begin on September 18 will be maintained, accelerated or slowed down. And the Fed will make this decision under the political pressure of an election campaign and probably without knowing yet who will occupy the White House. A very delicate situation but one that, throughout history, has been resolved by clearly asserting its independence, even if some doubts existed during Donald Trump’s term.
The elections will take place this year on Tuesday, November 5, but It is very likely that the result will not be known until a few days later.: In 2020, Joe Biden’s victory was confirmed on Saturday of the same week, after four tense and interminable days of counting in the main decisive states. And, judging by the surveys, everything seems to indicate that the scenario will not be very different this time.
If so, the body headed by Jerome Powell will have to sit down to debate a key decision without a fundamental piece of information on the table: who will govern for the next four years. And, in this case, that fact is very important: Allianz warned in August that a Trump victory, with tax cuts and sharp increases in tariffs, “could reactivate inflation”, forcing “the Federal Reserve to suspend its flexibility cycle in 2025”. Generali also warned that “the outlook for next year clearly depends on the outcome of the elections, given the possible strong inflationary implications of the Republican program”.
So, everything indicates that the Fed will have a hard time lowering rates in September, as the market already takes it for granted, and the US central bank has already anticipated that it will make this move. The problem will come later, at the November meeting, where the organization will have to make a decision without knowing who will be president and the consequences on economic policy that either candidate could have.
This scenario is completely different from the one that is emerging for the European Central Bank. The organization led by Christine Lagarde already started to lower rates last July, and the market anticipates a process that will not have any surprises in the coming months: a cut of 25 basis points at each meeting before starting 2025.
It is worth noting that, as happened in July, the ECB scheduled its meetings a few days before the Fed, and everything indicates that the European body will follow its own path in this cycle of rate cuts, or at least, in the first of the months. Apart from the surprises that could occur in the exchange rate of the currency, euro/dollar, which could lead one or the other of the two central banks to decide to change its rates to counteract an aggressive movement of the currency that could be detrimental to the economy, Everything indicates that the two major central banks of the planet will establish their monetary policy in the next quarter without paying attention to what their counterpart is doing.
Moreover, the most important thing for the Fed in the last quarter, beyond the macroeconomic data published in the United States, is a possible victory for Trump because the only time in 50 years when the Fed was forced to change policy mid-cycle occurred precisely during the term of the American president, and after the attempts of interference by the American president within the Fed, which He had already threatened to appoint “dove” managers to the central bank.
Trump’s interference
Trump’s complaint against the Federal Reserve chairman he had chosen and appointed has its origins in the rate hikes that the Fed carried out between December 2015 and early 2019, during the Republican president’s term. Although this process was initiated by Janet Yellen, Trump wanted the election of Powell, who began her term in February 2018, to end the rate hike process, which did not happen: Powell continued the cycle that had left him in Yellen’s legacy, raising rates until December 2018, and leaving them “high” (at 2.5%) during the first half of 2019.
During this period, Powell had to endure constant criticism from Trump, and in the market, voices were raised asking the Fed to maintain its independence from the US executive. Powell publicly defended himself and assured that they would continue to take monetary policy measures based on the economic data published and not on political criteria. However, and although it is true that inflation did not reach the target of the American central bank, Powell modified in 2019 the plans that he himself had acknowledged following, and instead of continuing to raise rates until the beginning of 2020, as he had predicted, he began to lower them in July 2019, and did so on two more occasions before the arrival of Covid, in September and October of that same year.
After seeing the Fed’s strategy radically shifted in a way that benefited his electoral expectations, Trump also shifted his message, and by November, the US president’s rhetoric about Powell and the Fed had changed dramatically. After indicating that he was “not at all happy with his choice” of Powell and accusing the Fed of destroying all the administration’s efforts to improve the country’s economy, Trump went on to stress that his meetings with Powell were “very good.”
An impeccable record
Despite this U-turn during Trump’s term, which could lead some to doubt the Fed’s independence at this time, the American organization can be proud of its record. Since 1972, when interest rate records began to be collected in the country, the central bank has not allowed elections to interrupt its rate hikes or cuts. In the 13 elections that took place during this period, there was never any political interference in the central bank, nor for the imminent arrival of elections in the country.
During these five decades, all kinds of situations have occurred, from elections in which monetary policy was in the background and rates remained unchanged for long periods, to others, such as that of 1984, where on November 6, the same day, After the elections, the Federal Reserve, chaired by Paul Volcker, lowered rates, a decision that was part of the process that had begun months before. On other occasions, elections have taken place during a process of rate increases, as was the case in 1980.
So it seems clear that the Fed has historically acted independently of US political power, perhaps with the exception of Powell’s 2019 rate cut, which may be questionable.
