US Elections 2024: Can a Trump presidency jeopardize the US Fed’s independence? Here’s what economists say

US Elections 2024: The high-stakes US Presidential Elections 2024 have entered the final stretch as billions of Americans cast votes to pick their preferred President to lead the world's largest economy for the next four years. Vice President and Democratic candidate Kamala Harris and former President and Republican candidate Donald Trump continue to run next-to-neck in national polls and key battleground states in a tight race for the White House.

Ahead of the US Presidential election results due on Tuesday, November 5, 2024, some US economists believe that if Republican candidate Donald Trump wins the race to the White House to bag the US Presidency, the central bank's independence, US Federal Reserve, might be at risk.

Also Read: US Presidential Polls 2024: How has US stock market performed in last five elections? Here’s what 5-year data reveals

According to John Hardy, chief macro strategist at the Denmark-based investment platform Saxo, a Donald Trump presidency could put the independence of the US Federal Reserve at stake. “Pro-American or not, Trump’s intent to cut taxes further would stimulate the US economy and boost growth while expanding already absurdly large US deficits," said the economist.

US Elections 2024: Will Trump risk the US Federal Reserve's independence?

John Hardy of Saxo interviewed former White House Communications Director Anthony Scaramucci--Donald Trump's former communications director. Scaramucci was asked if the US Fed will have to serve as an enabler of Trump’s agenda under a Trump administration, which could risk far higher US inflation even if the US treasury market is orderly.

“These are big and tough questions – but all other factors equal, the US Fed would almost assuredly have a tough time under a Trump presidency and could even find its independence at stake if we see a Republican sweep," said the former White House communications director.

Also Read: Is S&P 500 signalling a Kamala Harris win in 2024 US presidential election?

Scaramucci thinks a Trump presidency will be a ‘bid risk’ and could interfere with the US Fed’s independence. “If he controls one of the houses through executive action or gets rid of Jerome Powell and puts in a loyal stooge, he could get that. That's extremely dangerous for the capital markets.”

“All capital market experts would say that an independent US Fed is better than a dependent one. And if you don't believe me, just look at what Erdoğan did to the Turkish Lira due to subjecting the central bank to his will - it would be very dangerous,” said Trump's former communications director.

On being asked about the US Fed's priorities, regardless of who is in the Oval Office, Scaramucci said, “The number one thing driving the market is the Federal Reserve interest rate policy, and that's coming down. We expect at least 150 to 200 basis points of additional reduction in interest rates over this 12 to 18-month period. I think that'll be generally good for the markets."

Observing the last five elections, the US stock market has tended to rally after the results were out. Increased volatility was observed in the period leading up to the elections. The US stock market has performed well over the long term under Democratic and Republican leadership. However, five-year data revealed that market returns have favoured the Democrats.

Investors can feel jittery during election years, concerned about how election results might sway their investment portfolios. Some even consider hitting the pause button on investing altogether to avoid uncertainty. 

However, historical data shows markets do not pick political favourites. The Nasdaq performs well in election years, particularly when policy direction is clear after an election. Markets have performed well post-election under Democratic presidents, as seen with Biden in 2020 and Obama in 2012. 

These rallies are often fueled by expectations of economic recovery and stimulus measures, though broader economic factors (e.g., recovery from recessions) are key contributors. “The market has also reacted positively to Republican victories. For example, Trump’s 2016 victory led to a sharp rally, with markets anticipating corporate-friendly policies, while Bush’s re-election in 2004 provided stability during the Iraq War,” said Sujit Modi, CIO, Share.Market.

Also Read: Oil drops 4% in five days on record US crude output ahead of US elections, Fed verdict; Brent settles at $73/bbl

US Fed Policy in September 

The US Federal Reserve announced its sixth policy decision for 2024 on September 18 after a two-day Federal Open Market Committee (FOMC) meeting and slashed the benchmark interest rate by 50 basis points (bps) or (½) half a percentage point to 4.75 per cent-5 per cent for the first time in four years, broadly in line with Wall Street estimates.

US Fed policymakers see the benchmark interest rate falling by another half-point (50 bps) by the end of this year, another full percentage point in 2025, and a final half-point reduction in 2026 to end in a 2.75 per cent-3.00 per cent range. One bps is equal to one hundredth (1/100) of a percentage point.

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.