Campaign promises complicate outlook on Fed policy

Vice President Kamala Harris and former President Donald Trump have both made a barrage of campaign promises on spending, taxation and trade policies that would come with hefty price tags. Those outlays could complicate the Federal Reserve’s plans for lowering interest rates.

The Committee for a Responsible Federal Budget, a nonprofit organization that tracks and analyzes fiscal policies, projects that Harris’s proposals would increase the nation’s $35.4 trillion debt by $3.5 trillion during the next decade, while Trump’s plans would grow it by $7.5 trillion. 

Fed Chair Jerome Powell has repeatedly warned that the country is on an “unsustainable fiscal path” because the debt is growing faster than the overall economy, but he has said the Fed does not adjust its monetary stances based on individual fiscal policies. 

Still, the details of the two candidates’ plans could disrupt the Fed’s efforts to combat inflation, Michael Redmond, a U.S. policy economist for Medley Global Advisors, said. Specifically, he pointed to Trump’s wide-ranging tariffs proposals — which could lead to a spike in prices — coupled with the demand-inducing impacts of his proposed tax cuts. 

Redmond, a former economist with the Federal Reserve Bank of Kansas City, said traditionally the central bank would view such a tariff-related price bump as a supply side shock that will eventually be absorbed by the economy. But, with the Fed’s now-debunked “transitory” read of post-pandemic inflation still fresh in the minds of citizens and policymakers alike, the central bank may be incentivized to respond quickly to rising prices. 

“People seem to diverge in their views on how the Fed can respond and should respond to this kind of supply side shock, and also how much of a boost we would get on the demand side from Trump’s tax cut proposals,” Redmond said, noting that Treasury yields have been trending up in recent years as market participants anticipate a Trump victory.

A Harris administration would present fewer challenges for the Fed. The Committee for a Responsible Federal Budget estimates that the potential debt implications of the Harris agenda range from zero dollars of new debt to $8.1 trillion, compared to Trump’s range of $1.45 trillion to $15.15 trillion. The Democrats’ grim prospects in the Senate also mean her ability to advance her legislative agenda may be limited. 

But that lack of a governing majority could also complicate Harris’s ability to navigate federal funding negotiations or remedy the nation’s ballooning deficit. Redmond said this will likely result in the current tax regime being extended without significant changes.

“Treasury yields would likely return to where they were before the swing toward Trump,” he said. “As election uncertainties are resolved, we’d see lower long-end Treasury yields as a result of the narrowing of the fiscal range of options that markets might have to confront.”