25bps Cut? We Strongly Dissent!

We may or may not know tonight who will be the next president, but we should know which party will win a majority in the Senate and the House. It appears that Republicans are likely to do so. In this case, a Harris administration would be gridlocked, while a Trump administration would have more power to implement his policies, including higher tariffs (raising inflation risks) and lower taxes (ballooning the federal deficits). That could push the 10-year yield up to 4.75%-5.00%, which should attract lots of buyers.

Meanwhile, the Fed is widely expected to cut the federal funds rate (FFR) by 25bps on Thursday. If we were on the Federal Open Market Committee (FOMC), we would strongly dissent in favor of a pause. By most measures, including today's nonmanufacturing PMI report, the economy has been roaring even before the Fed's September 18 meeting when the FFR was cut by 50bps (chart).