Jerome Powell has played an enormous, although independent, role in the economic success of President Joe Biden.
The Federal Reserve chairman has helped steer the nation from the depths of the Covid pandemic, surging inflation, an oil price shock and a regional banking crisis into a growth story the Economist last month called "the envy of the world."
That in some ways shifts the focus from what is expected to be a routine quarter-point interest rate cut later this week in Washington, following a two-day policy meeting delayed by Tuesday's election, to the Fed's expected rate path under a new president.
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Markets fully expect Powell to lower the benchmark Federal Funds Rate by 25 basis points Thursday, with a follow-on cut in December that would take it to between 4.25% and 4.5%.
But those cuts, of course, will be based largely on the known government policy and its expected impact on jobs, growth and inflation under a Biden Presidency.
That all changes this week, and in a practical sense early next year, with a new Congress, a new president and a likely vastly different expectation for taxes, spending and regulatory changes in coming years.
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In other words, Thursday's Fed meeting is effectively the last that can reasonably be based on current projections, given that by the time of the December sit-down, Powell and his colleagues will have at least a framework of understanding as to who will guide the economy heading into 2025.
"This is my fourth presidential election at the Fed," Powell told reporters during his regular post-meeting news conference in July. "Anything that we do before, during or after the election will be based on the data, the outlook and the balance of risks and not on anything else."
"We can run simulations of different potential policies, but we would never try to make policy decisions based on the outcome of an election that hasn’t happened yet," he stressed. "That would just be a line we would never cross."
So what will that mean for interest rates once the American people have made their decision?
Goldman Sachs is dovish on interest rates
Goldman Sachs's chief economist, Jan Hatzius, remains convinced that the Fed will follow through on the hints of two more cuts by year-end, particularly following last week's weaker-than-expected jobs report. He expects more of the same into the first half of 2025.
"We are penciling in four more consecutive cuts in the first half of 2025 to a terminal rate of 3.25%-3.5% but see more uncertainty about both the speed next year and the final destination," Hatzius said in a note published Sunday. He added that his forecasts are around 0.5 percentage points ahead of the market consensus.
He also isn't sure that the Fed will have enough information to alter its course until next year at the earliest.
"Potential fiscal policy changes after the elections are another source of risk to the Fed path, though probably further down the road," he said.
"Even after the election outcome is known, the [policy-making Federal Open Market Committee] might prefer to wait for more clarity about what policy changes will actually take place before rethinking its economic outlook and plans for the funds rate."
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The job market is slowing, of course, and even absent last week's hurricane and strike-affected report, the average monthly tally of new hires over the five months ended in September was 156,000, down from 182,000 over the January-to-May period.
Still, with third quarter GDP growth pegged at 2.8%, the unemployment rate at 4.1% and corporate earnings still expanding at near double-digit rates, the chances of a "no-landing" scenario for the world's biggest economy are much greater than any near-term recession risk.
"Goldilocks is coming to town,” said David Russell, global head of market strategy at TradeStation, following last week's GDP report. "
"Inflation is becoming a thing of the past and the economy is getting back to its old self, with strong consumption and moderate prices," he added.
Wild card risk to interest rate cut predictions
That said, a wild-card risk to the Fed's rate-setting process next year will be Powell's fate. Powell was appointed by former President Donald Trump and extended to a second term as chairman under President Biden. His term currently ends in May 2026.
Trump has said he won't fire Powell. However, he also has said he could if he wanted to (a view that few legal scholars corroborate) and insisted earlier this year that a president "should have at least a say" in monetary policy.
“In my case, I made a lot of money. I was very successful. And I think I have a better instinct than, in many cases, people that would be on the Federal Reserve — or the chairman,” he told reporters during a news conference at his Mar-a-Lago estate in Palm Beach, Fla.
Related: Jobs report shocker puts Fed interest-rate cut in play
Market projections for the longer-term rate path under those conditions — where borrowing increases to pay for promised tax cuts and growth potentially slows under the weight of record tariffs on imported goods — would be difficult in the best of times.
Added to that is the fate of tax cuts put in place under the Tax Cuts and Jobs Act of 2017, which expire next year and will face a major showdown in Congress in order to be extended.
Fed still driving rates lower
A president keen on voicing his opinion on rates or moving to unseat the Fed chairman himself would make forecasting the near-term rate path nigh impossible.
Mike Goosay, chief investment officer for global fixed income at Principal Asset Management, sees it differently and says bond markets are poised to outperform as the Fed remains dovish.
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"Ultimately, while the election outcome will lead to repositioning among fixed-income investors in the short term, the inflation and labor data will continue to drive the Fed’s actions over the intermediate to long term and should support further cuts as the Fed reduces restrictiveness," he said.
"We believe that the recent increase in yields and potential for them to push a bit higher depending on election outcomes provides an attractive entry point for fixed income, which is poised to benefit from a duration tailwind due to Fed cuts in addition to favorable starting yields," Goosay added.
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