US Elections: Impact on the conduct of monetary policy - Natixis

Research Team at Natixis, suggests that the outcome of the US elections is unlikely to influence the conduct of monetary policy in the short term.

Key Quotes

“The new President will not be sworn in before January, while the market volatility triggered by these elections will have subsided by the time the FOMC meets on 14 December.

On the other hand, the outcome of the elections could impact expectations for the Fed Funds rate over the medium term in several different ways. A victory of the Democratic candidate would probably be perceived as having neutral, possibly slightly dovish implications (depending on eventual appointments to the board over the term of the new President), whereas a victory of the Republican candidate could lead to expectation the Federal Reserve will pursue a more vigorous monetary policy.

The next President may well decide against Janet Yellen serving a second term (current term expires at the start of 2018). The capacity of the new President to implement his campaign manifesto (which will depend on the balance of power in Congress) could also affect expectations as regards growth and inflation: outlook for growth and inflation tilted slight on the upside if the Democratic candidate wins (spending on infrastructure, increase in minimum wage), while there is a risk of stagflation if the Republican candidate wins (introduction of customs tariffs, reduction in inward migration and uncertainties over the impact of fiscal reforms).

More generally, the debate no longer seems to be over the timing of the next interest rate hike (in December), but rather over the conduct of monetary policy over the medium term. Putting to one side the outcome of the elections (inasmuch as this is possible), will the Federal Reserve be content to raise the Fed Funds rate just once in 2017 (market pricing) or twice (median prediction per the FOMC dot plot)? Our view, given our scenario for GDP growth (+2.2% in 2017) and inflation (+2.5%) is that the Federal Reserve could be prodded into accelerating its monetary tightening and opt for three interest rate hikes each year.”