FOMC Preview: A Political Decision?

With Biden out, having been threatened with expulsion under the 25th Amendment, the presidential election has become more unpredictable. Harris’s appeal as a candidate remains to be seen, but at the moment the media is making a full-court press to build enthusiasm for her after having spent four years diminishing her. It will likely be a close election. Our quantitative model has now, for the first time, flipped to predict Trump as the winner. The FOMC Wednesday will likely signal the first rate cut will come in September. That is deeply expected by markets, and there will be a reaction if they fail to do it. The perception of intervening in the election by acting so close to it could conceivably stay the Fed’s hand, but there is no evidence over history that the Fed acts differently around elections. The Fed can be accused of bias whether it acts or doesn’t, so it will likely do what it thinks is right objectively, which is start cutting in September in the face of mounting proof of continued disinflation after an embarrassing false alarm in the first quarter. Easing has already begun with the dialing back of QT. The Fed is not as restrictive as it has been saying it is, as the strength in the economy proves. A decade out, based on the Treasury forward curve, today’s funds rate would be about neutral. In the meantime, secularly rising yields will gradually move the Fed’s perception of neutral higher. If the 10-year Treasury is the best proxy for the neutral rate, then today’s policy is only five rate cuts away.