Traders across stock, bond, and currency markets are closely monitoring developments as the U.S. enters an important phase with upcoming elections and a crucial Federal Reserve meeting. Recently, U.S. stocks, the dollar, and Treasury yields have all declined. With the election drawing near, traders remain cautious amid polls showing a tight race between Republican candidate Trump and Democrat candidate Harris. The possibility of a contested election outcome raises concerns about potential market volatility.
Apart from market impacts, institutional focus is also on the election results. Federal Reserve Chair Powell’s term will end in 2026, and both Trump and Harris have expressed opposition to his reappointment, prompting discussions about his potential successor.
The election outcome could significantly influence the Federal Reserve's monetary policy trajectory in 2025. Analysts predict fiscal deficit expansion regardless of the victor, although Trump's approach might be more aggressive. Tax policies would likely continue under both candidates, potentially expanding the fiscal deficit further. A Trump victory could ease the passage of his policies, potentially extending the 2017 tax cuts set to expire in 2025.
David Kelly, Chief Global Strategist at JPMorgan Asset Management, warns that while the Fed operates independently, it will still react to the election results due to potential economic impacts. Kelly suggests that the Fed is likely to cut interest rates by 25 basis points at its next meeting. However, if Trump wins, his fiscal policies may increase inflation, prompting the Fed to halt its easing cycle as early as December.
The market is actively discussing potential successors to Powell. Lorie Logan, current Dallas Fed President, is considered a notable candidate due to her unique experience. Logan, who joined the New York Fed in 1999, has played a significant role in monitoring financial markets and recently influenced the Fed's decision to slow its balance sheet reduction, signaling her growing influence. Some suggest that Christopher Waller, a Fed governor, or Lael Brainard, former Vice Chair, could also be contenders for the position.
