Brazil’s Central Bank Chief Roberto Campos discussed how the election in the U.S. is becoming an increasing factor when it comes to inflationary rates in an event hosted by Itau on the sidelines of the International Monetary Fund and World Bank annual meetings. These worries have been affected by the recent polls that show a close tie or victory by former President Trump. The market has begun to take notice of these impending results.
The government and president have no direct impact on interest rates; however, markets begin to take notice during the campaign season for high-profile elected offices. Over the past two years, interest rates have been at the highest levels in over 23 years to reduce inflation. In September, the Fed decided that it was time to cut rates for the first time in over four years by .50%.
The election of the new president has indirect effects on long-term interest rates due to many factors, such as economic policy expectations, market sentiment, fiscal policy outlook, monetary policy implications and global influences. With these differing policies between the candidates, Campos discussed further how both presidential campaigns have fiscal expansion elements, along with protectionism and shifts in immigration policy, which could have inflationary implications as well. For the first time in more than 20 years, cash and bonds have become considered suitable investments with the help of higher rates over the past two years. However, the personal impact of the rise in the cost of homeownership and the company’s capital being more expensive have contributed to the government’s declining budget.
The election’s main impact on the long-term interest rates is based solely on the supply and demand for bonds. The larger a government’s deficit, the greater the bond supply, creating a larger supply of bonds, lower bond prices and higher bond yields. A country’s bond demand is mainly based on growth and inflation expectations. Higher growth and higher inflation for a country create higher yields. The reverse is for lower growth and lower inflation. Thus, the newly elected president’s economic promises, like higher spending or lower taxes, could create a long-term bond yield. A mixed election where one party could hold the White House and the other hold Congress would possibly lead to no changes to national spending or tax policies, lowering yields.
Investors are also closely inspecting the election polls as Americans approach election day. Investor fear can affect the market, like bonds, more than any political policy. If investors fear one outcome over another, they tend to stop investing in riskier markets like the stock market and go to areas of determined safety such as cash, gold or U.S. Treasury securities. Fear can drive higher buying prices for these areas, creating less of a yield. Professionals in their fields and politicians have noted that this election may lead to long-term effects in our everyday society, suggesting legal challenges or possibly political discord, so investors would begin to pull out of the markets, allowing yield to drop. The more unstable our country seems, the riskier U.S. government securities seem; the credit is perceived as creating higher inflation rates.
Remember that the election will directly impact interest rates in minor ways. The supply and demand determined by our government’s deficits will have a more direct impact, which, in turn, will impact the supply and demand drivers that will help the federal reserve determine how to move interest rates.
