Biden vs Trump: Evercore ISI offers outlook for fed funds rate in each scenario
Despite interest rates being at elevated levels, the economy hasn’t weakened the way many had forecast. In a research note, Evercore ISI examines the effect that the Fed’s fiscal policy is having on interest rates, noting that compared to a pre-Covid baseline it probably still is stimulating the economy.The impulse from fiscal policy is however likely to moderate over the next 12-18 months which would bring the short-run r* down.
“If the Fed were to set policy to fully offset that stimulus, it would need to engineer long-term interest rates—such as the ten-year Treasury yield—that are nearly 25 basis points higher than in 2019,” wrote analysts in the note.An additional approach used by Evercore to determine the effect fiscal policy is having is the ‘optimal control’ model-based assessment.
“This suggests that 70bp to 100bp of cuts might be needed through end next year to offset fading fiscal support and the associated decline in short-run r*, separate from other considerations that will shape the rate path,” added analysts.The report also considered the implications of the U.S. elections on fiscal policy. Importantly, Trump’s first-term tax bill is set to expire at the end of 2025.
Biden’s approach is estimated to lead to a fed funds rate that’s 25bps lower than if the TCJA were to be extended under Trump.Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events.
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