Trump's Victory Could Lead to Fed Pausing Easing Policies in December! Risks of Trade Wars, Fiscal Deficits, and Rising Interest Rates

On Monday, David Kelly of jpmorgan Asset Management gave his opinion in an interview with the media that if Trump wins this week's U.S. election, the Federal Reserve may pause its easing policy in December. Kelly noted that Trump's proposed expansionary fiscal policy plans could cause inflation to rise and prevent interest rates from falling further.

"If Trump leads the Republicans to a sweeping victory, we could see a more expansionary fiscal policy, which could lead to trade wars, widen the fiscal deficit and push up interest rates," Kelly said in an interview.

Trump's proposed universal tariff plan, including tariffs of up to 60 percent on Chinese imports, and his tight controls on immigration, are widely seen as increasing inflation. These policy programs require substantial federal spending, further exacerbating the federal budget deficit.

Kelly believes the impact of these policies could prompt the Fed to pause the rate cut process. In an interview with the media, he said: "I think the Fed will pay close attention to the direction of fiscal policy. "If fiscal policy is likely to lead to higher deficits, more fiscal stimulus and higher inflation, the Fed may feel that if fiscal policy is heading towards expansion, then they need to slow the pace of easing to offset that."

On the other hand, Kelly believes that if Vice President Harris wins, the economy could be on track for a soft landing. "If there is a divided government, such as a Harris presidency, I think the economy will continue a slow and steady soft landing, though it may seem a little flat."

In that case, Kelly expects the Fed to stick to its current path of easing policy. "I think they will follow the expectations of the dot plot until the economic situation forces them to change course," he said, citing the potential risk that inflation could rise again.

The Fed's dot plot shows its members' forecasts for the path of interest rates over the next few years. A dot plot released in September this year showed that another 50 basis point rate cut could be expected before the end of the year, with further easing expected in 2025.

Although the Fed operates independently, Kelly noted that political factors could still have an impact on it, as political developments could affect the direction of the economy. Kelly said: "When the Fed has some sense of the direction of fiscal policy, I think that will affect their decision-making. They don't try to direct how the federal government should act, but they react to government policies or actions that might be taken."

As a result, he expects the Fed to almost certainly cut rates by 25 basis points at its next meeting on Nov. 7, even if the election results are not yet known.