What Impact Will the Presidential Election Have on the Fed’s Path for Interest Rates?

Polls show a close presidential race going into November, and economists are trying to forecast how the Federal Reserve’s interest rate policy might change in coming years under a new president. 

Overall, analysts anticipate that the economy will continue to grow under either Democratic candidate Kamala Harris or Republican candidate Donald Trump. However, each presents different economic scenarios depending upon which policies they pursue.

The Federal Reserve is designed to be an independent, nonpartisan organization so that the central bankers can make decisions based on economic best practices rather than political considerations. While Federal Reserve officials don’t advocate for political proposals, they have said they are ready to factor in how fiscal policies will affect the economy.

“We take whatever policies are enacted by the Congress and signed into law by the president as an input into our analysis of the economy,” Minneapolis Fed President Neel Kashkari said at a recent event. “Whether it’s tariffs or it’s taxes or it’s spending, all of that just goes into our analysis into where do we think the U.S. economy is headed.”

These policy changes could complicate Federal Reserve policymakers’ jobs as they work to steer the economy toward a soft landing. It has already been a bumpy ride. Stubborn inflation and rising joblessness have muddied the path ahead. Hurricanes and labor strikes have clouded the economic data central bankers use as guideposts. That’s left economists unsure about whether the Fed will continue to cut its influential fed funds rate or hold tight moving into 2025.

Economists examined some of the likely outcomes of key policy decisions for both candidates to gauge how the Federal Reserve could react.

Trump’s Tariff Proposal Could Affect Fed’s Path

Economists see two different scenarios for the Federal Reserve under a Trump presidency, depending on whether his administration is able to enact the broad tariff hikes he has proposed.

“It’s really going to depend on what the congressional outlook looks like there in terms of our Fed funds call,” said Jay Bryson, Wells Fargo managing director and chief economist at its corporate and investment banking division.

If tariffs aren’t raised significantly, a Trump presidency is projected to produce higher growth from lower taxes and more deregulation, though stricter immigration policy could add some headwind to the economic expansion, said a Deutsche Bank report from a team led by Chief U.S. Economist Matthew Luzzetti.

Economists said that in that scenario, the Fed may need to keep interest rates higher than currently planned to prevent inflation from reigniting.

However, if Trump were able to get his proposed tariff policy passed, Deutsche Bank analysts said inflation would likely move higher. It could potentially force the Fed to hike rates, especially if consumers expect inflation to continue to climb.

The Outlook for Rates Under a Harris Presidency

Deutsche Bank said a Harris presidency isn’t projected to bring the same surge in growth as in the Trump scenario, potentially allowing Fed officials to lower rates more aggressively than it currently expects.

Bernard Yaros, lead U.S. economist at Oxford Economics, said a Harris presidency could change the Fed’s calculus in different ways.

“It’s the policies, especially child care, that are increasing the supply of labor; they’re increasing the speed limit of the economy,” Yaros said in a conference call on the impacts of the election. “So when we boost growth by raising labor supply, that is not inflationary. It allows the economy to run at a faster rate of growth without unleashing excess inflation.”