Federal Reserve all set for rate cut, brushing off election uncertainties

The Federal Reserve plans a quarter-point rate cut next week, pressing on with a policy shift despite weak October jobs numbers and uncertainty from Tuesday’s presidential election.

The central bank is aiming to ease the federal funds rate to 4.5-4.75%, a level that Fed officials think could balance inflation concerns without dragging down growth. This quarter-point cut marks a shift back to moderate rate adjustments after September’s half-point chop.

The upcoming rate decision, set for two days post-election, could be complicated by unknown outcomes from the presidential race, which may not have clear results by then.

Yet Fed officials have stressed that recent economic strength and a controlled inflation rate justify gradual easing, regardless of political factors.

Fed’s strategy to avoid economic slowdown

Economic growth is still solid, thanks to robust consumer spending and a resilient job market, despite October’s disappointing employment report. GDP rose 2.8% in the third quarter on an annual basis, a slight decrease from prior growth rates but still reflecting a stable expansion.

Friday’s job report added only 12,000 positions, the lowest gain during Joe Biden’s presidency. According to the Bureau of Labor Statistics, recent hurricanes in the southeast and strikes at Boeing and other companies skewed these figures, with strikes alone slashing 44,000 jobs from October’s payroll numbers.

Most analysts see October’s job data as a temporary setback, with no signs of sustained weakness. Fed officials are pushing toward a neutral interest rate that won’t stoke or stall economic growth. They’re focused on hitting a 2% inflation target without severe job losses.

The personal consumption expenditures (PCE) index, a key inflation measure, dropped to 2.1% in September. However, the core PCE, which excludes volatile food and energy prices and is closely monitored by the Fed, remains higher at 2.7%.

In recent weeks, Fed insiders have favored gradual cuts, pointing to no need for drastic moves like September’s half-point cut. Esther George, who retired as Kansas City Fed president, explained that:

“People have been trying to define the word ‘gradual.’ Is it every other meeting? Is it every meeting? I think right now it’s code for not 50 [basis points].”

George also noted that while inflation has cooled, it’s still hovering around 2.5-3%, and potential upside risks could increase.

According to Seth Carpenter, Morgan Stanley’s chief global economist and a Fed veteran, inflation could “stall out” above 2%, which might push the Fed toward more cuts, including a quarter-point reduction in December, until reaching around 3.25%. “Inflation really is first order here,” Carpenter said. “If things are not fine with inflation, then the jobs data really matter a lot in terms of skipping a cut.”

Election uncertainty looms over Fed decision

The upcoming Fed meeting lands right after the U.S. presidential election, with officials treading carefully amid possible election-related turmoil. Donald Trump and Kamala Harris have sharply contrasting economic platforms, which could reshape the outlook for inflation and growth.

Trump has vowed to bring back protectionist trade policies, lower corporate taxes, and tighten immigration rules, all while pushing for more influence over the Fed—a move that could shake the Fed’s independence. Harris, by contrast, has advocated expanding social programs, funded by taxing the wealthy, while ensuring the Fed remains independent.

Economists believe Trump’s agenda would likely fuel inflation, while Harris’s approach would have a more moderated economic impact. However, how these policies will materialize depends on the balance of power in Congress.

Eric Rosengren, former president of the Boston Fed, said he does not expect Fed Chair Jay Powell to lay out a long-term policy direction at next week’s meeting. “You don’t want to give guidance if you’re pretty uncertain about what the outcome is going to be,” he said.

Trump’s 2024 election campaign remains fixed on his 2020 “stolen election” narrative, suggesting he may challenge results if Harris wins. Back in 2020, Trump declared victory early on election night, exploiting a “red mirage” lead from in-person votes before mailed ballots, mostly favoring Biden, were counted.

Trump’s challenge continued for two months and over 60 failed lawsuits before culminating in the January 6 Capitol riot. His 2024 strategy builds on this same narrative.

Two possible election-night scenarios have legal experts on edge. A Harris win could spark an information war aimed at stopping her certification. Trump, if victorious, would likely tighten his grip on power without much challenge.

“If Harris wins even by a small margin, there is very unlikely to be a repeat of January 6,” says Rosa Brooks, a Georgetown Law Center professor. “This time Trump will not be president, the certification process is much stronger, and Biden won’t tolerate violence.”

Even a slim Harris victory could spell trouble, given the razor-thin margins in key states. In 2020, Biden led by 6 million votes but needed nine days for Arizona’s final result and 16 days in Georgia. Thin margins this year could prompt lengthy counts and trigger recounts in several swing states if the gap is under 0.5%. 

Trump-aligned conservative groups, including True the Vote, are already filing lawsuits challenging voting procedures and voter eligibility, surpassing the pace of 2020 litigation. Ian Bassin, head of Protect Democracy, noted that “Most of these suits are frivolous and won’t get anywhere, but they show that Trump’s legal game is far better organized this time.”

U.S. election systems have seen reinforcements. Congress passed legislation two years ago making it harder for states to submit alternate electors, a loophole feared in 2020. Bassin noted, “It is really hard to see how Republican legislatures could pull that off.”

However, there is rising concern about potential public disorder fueled by disinformation, such as deepfake videos showing fake ballot-stuffing, which could mobilize militias or lead to bomb threats that shut down polling stations.

The Fed’s cautious approach is all about safeguarding stability. Rosengren highlighted that officials want to avoid giving strong guidance during a time when uncertainty is at its peak. Election night tensions and the aftermath of a contested result could ripple through the Fed’s decision-making, especially if results remain unclear for days or weeks.

With rate cuts on a “gradual” path, the Fed’s aim is to avoid aggressive moves unless inflation spikes again. This strategy leaves open the possibility of more cuts if inflation eases further but ensures there’s room to maneuver if it rises.