The prospect of Trump returning to the White House is gradually becoming clear, and the future interest rate path in the USA may face changes.

According to the latest research report released by Bank of America Merrill Lynch, the outcome of the US presidential election may have a much greater impact on the future policy path of the USA Federal Reserve than the remarks of Federal Reserve Chairman Jerome Powell at the monetary policy news conference.

On Tuesday local time, analysts Aditya Bhave and Shruti Mishra of Bank of America Merrill Lynch released a report pointing out that although the market generally focuses on Powell's statements on economic outlook and monetary policy, the new president's adjustment to fiscal policy will directly impact the Federal Reserve's decisions.

The two analysts wrote in the report:

In our view, the impact of the election on the Federal Reserve's policy path will be much deeper than any remarks Chairman Powell made at the press conference.

The report further explains that if Trump takes office and implements fiscal expansion, the Federal Reserve may raise its neutral rate expectations. In addition, if the new president significantly imposes tariffs, the Federal Reserve may pause rate cuts due to considerations of inflation and economic growth impact.

The US presidential election has just ended. According to the latest report from CCTV News, based on calculations released by The Hill, Fox News, and other US media outlets, US Republican Presidential candidate Trump is expected to win more than half of the electoral votes and is predicted to secure victory in this US presidential election.

It is almost certain that there will be an interest rate cut in November, paying attention to Powell's statements on the elections.

The next interest rate decision of the Federal Reserve will be announced in the early hours of November 8 Beijing time. The market unanimously expects the Fed to cut interest rates by 25 basis points, lowering the federal funds rate to the range of 4.5%-4.75%.

Bank of America Merrill Lynch pointed out that the weak October non-farm payrolls report is sufficient to prompt the Fed to cut rates by 25 basis points in November, followed by another 25 basis points cut in December.

The Bank of America Merrill Lynch report mentions that although Powell may emphasize the stability of the economy and the return of inflation targets at this meeting, the market should pay more attention to the impact of election results on fiscal policy. Bank of America Merrill Lynch believes that changes in fiscal policy will directly affect the Fed's monetary policy, especially in the current economic environment.

During the post-meeting press conference, Powell may be asked about election issues, but Bank of America Merrill Lynch expects him to emphasize the Fed's commitment to its responsibilities, react to upcoming data, rather than comment on the policy agenda of the next administration.

This indicates that despite the significant impact of election results on Fed policy, the Fed will still maintain its independence, refraining from direct comments on political agendas.

If tariffs are significantly increased, the Federal Reserve will be even more cautious.

The report also mentioned the impact of tariff policy uncertainty on Federal Reserve policy.

Bank of America Merrill Lynch pointed out that the Federal Reserve's reaction to tariffs is difficult to determine, as they may overlook the impact of tariffs on inflation, consider it as temporary price fluctuations, and focus on negative growth consequences.

However, considering the Federal Reserve's misjudgment of the impact of supply shocks in 2021, believing its impact on inflation is "transient", therefore, facing significant tariff hikes by the government, the Federal Reserve may be more cautious and consider pausing the interest rate reduction cycle.

Coincidentally, JPMorgan also warned earlier that if Trump wins on Wednesday, the Federal Reserve may pause the easing cycle as early as December, with the bank expecting a 25 basis point rate cut in November.

Editor/ping