Two topics have dominated the discussion on the U.S. economy for several years: inflation and interest rates.
Indeed, the seemingly ceaseless march of significant interest rate hikes announced following each Federal Open Market Committee (FOMC) meeting between early 2022 and mid-2023 brought forth substantial recessionary fears after managing to reduce inflation from a multi-year record of above 9%.
As the fears subsided in late 2023 – and inflation significantly cooled off – experts, analysts, institutions, and investors started forecasting significant interest rate cuts throughout 2024, though these hopes have, so far, borne no fruit.
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Indeed, several consecutive inflation increases in the first quarter of 2024 have brought a change to the predictions – and even resurfaced talk of further interest rate hikes – and though matters remain unclear and uncertain, one upcoming event is likely to have a significant impact on fiscal policy no matter what: the November presidential elections.
Will Biden or Trump cut rates faster?
Given the significant differences in other areas – capital gains taxes being a particularly hot topic in recent weeks – FInbold decided to take a look at which of the two most likely candidates, Joe Biden and Donald Trump, is more likely to reduce interest rates faster.
Evercore ISI has recently undertaken a research effort aiming to discover which of the likely presidential candidates is likely to start cutting interest rates faster.
Perhaps surprisingly, the banking advisory firm found that a second term for President Biden is likely to lead to interest rates about 25 basis points – 0.25% – lower than a second Trump presidency.
Why interest rates are likely to be lower under a second Biden presidency
The crux of the argument boils down to tax policy – or, rather, the Tax Cuts and Jobs Act (TCJA). According to Evercore, President Biden is likely to repeal TCJA – particularly due to its reduction of corporate taxes, as well as the reduction of taxes for higher net worth individuals.
Such a move would be consistent with Biden’s other proposed policies, most notably the higher maximum capital gains tax and the tax on unrealized gains of exceptionally wealthy individuals – reportedly those with a net worth higher than $100 million.
Either way, the removal of TCJA would limit the disposable income available to many investors and potential investors, which would, indeed, increase the need to increase economic stimulus in other areas – such as by decreasing interest rates.
On the other hand, President Trump – who signed the TCJA into law in 2017 in the first place – would be likely to extend the act which would reduce the need for lowering interest rates.
Nonetheless, Evercore, in the same report, indicated that it expects the Federal Funds Rate to start falling in the second half of 2024 and ideally be between 75 and 100 basis points lower by the end of 2025.
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