David Kelly, the global chief strategist at JPMorgan Asset Management, recently issued an "ultimate warning," stating that if former President Trump wins this week's U.S. election, the Federal Reserve may halt the current easing monetary policy cycle as early as December to counter potential economic shocks. Kelly noted that Trump's expansionary fiscal policy, especially increased federal spending and high tariff policies, would drive up inflation and prompt the Federal Reserve to slow down interest rate cuts.
In an interview, Kelly mentioned that if Trump wins and the Republican Party secures a major victory in the election, more expansionary fiscal policies would be implemented, including increased federal spending, high tariffs on imports, and tighter immigration policies. These measures would raise inflation and expand the fiscal deficit, possibly forcing the Federal Reserve to pause interest rate cuts. "The Federal Reserve will closely watch the direction of fiscal policy," Kelly said, "If fiscal policy is expansionary, they will have to slow down easing measures to combat potential inflationary pressures."
Trump previously promised to levy a 10% tariff on all imported products, with tariffs as high as 60% on Chinese goods. His policies of high tariffs and restricting immigration are deemed as possibly leading to higher price inflation risks. Moreover, this policy would involve substantial federal spending, deepening the fiscal deficit. Kelly believes that if these measures are implemented, the Federal Reserve will have to reassess its rate-cut policy to avoid overstimulating the economy and may even pause rate cuts at the December meeting.
Conversely, Kelly pointed out that if Vice President Kamala Harris wins, the U.S. economy may continue on its current "soft landing" trajectory. He believes that under Harris's leadership, a divided government will continue steady, albeit moderate, economic growth. In this case, the Federal Reserve may continue its planned easing policy path without easily making adjustments.
The Federal Reserve's "dot plot" released in September suggested an additional 50 basis points rate cut by the end of the year, with further cuts planned for 2025. However, Kelly believes that although the Federal Reserve operates independently from the government, it will still react to the direction of fiscal policy and adjust its policies as needed to respond to economic changes.
Kelly expects that the Federal Reserve will almost certainly announce a 25 basis points rate cut at the November 7 meeting, but it may pause its easing policy at the December meeting to observe the impact of fiscal policy on the economy and address possible inflation risks.