Post-election markets react to policy shifts and Fed tensions

U.S. election day

The S&P 500 gained almost 5.00% in the week, with most of that increase coming directly after the presidential election. The 10-year Treasury also climbed from an open at 4.28% to a day’s peak of over 4.75%. The rise in equities reflects market sentiment that the new regime’s corporate tax cuts and other business-friendly policies will encourage growth over the next few years. In response, rates rose, as fiscal stimulus in the form of tax cuts could force the Fed to turn more hawkish to keep inflation at bay. All said, the election sparked short-term volatility that will likely continue as Trump clarifies his economic initiatives for the first year in office.

FOMC meeting

Thursday brought the much-awaited FOMC meeting for November, which ended in a 25-basis-point rate cut. This came on the tail of the first cut of 50 basis points in September. While November’s decision was in line with market expectations, Fed Chair Jerome Powell’s conference after the meeting drew significant interest, as Trump’s victory could mean new political pressure from the executive branch on the Federal Reserve. Powell, however, insisted that the election would not affect near-term Fed decisions. He also explicitly stated that if he is asked to resign by the incoming President, he will decline. When further pushed on the legality of being forced out, Powell said that to do so is, “not permitted under the law.”

For context, existing legislation says a Fed member can be, "removed for a cause by the president," but the current situation likely does not meet this standard. The closest thing to precedent was an attempt to remove the Federal Trade Commission Commissioner by Franklin D. Roosevelt, which ultimately failed. It is possible that, if an attempt to depose Powell made it to the Supreme Court, they would rule in favor of expanding presidential power, especially given current party affiliations. Otherwise, Trump will need to wait until 2026, when he can legally demote Powell from his chair position. Tensions between the Fed and the executive branch will likely create volatility in markets, as current plans for legislation include numerous stimulative policies that could fuel further deficit spending and inflationary pressures. These policies include imposing high tariffs on imported goods, deporting migrant workers, lowering the corporate tax rate to 15.00%, exempting certain incomes from taxes, and others. While adoption of these policies isn’t guaranteed, some are likely to move forward.

Consumer sentiment

The latest consumer sentiment reading showed signs of optimism as we head into the end of 2024. Friday’s preliminary report included a reading of 73.0, higher than the expected 71.0. This represents 3.50% growth month-over-month and 19.10% growth year-over-year.

The week ahead

This week we will have new inflation data, with CPI on Wednesday and PPI data on Thursday. The Fed aims to inch closer to its 2.00% mandate and keep the U.S. on track for a soft landing. Retail sales data will also come out on Friday.