Federal Reserve expected to tighten further despite political shift – TD Securities

A further 50 basis points of rate rises by Q1 2027 remains the forecast from TD Securities analysts, despite the political shift following a Democratic blue wave. They see the Federal Reserve continuing to tighten policy, while highlighting possible changes in Fed personnel and a potentially more hawkish stance from Chair Warsh. Easing tensions with Iran or weaker AI investment could, however, limit the extent of further tightening.

Rate rises remain on course despite blue wave

"While the political landscape has changed, the macro environment remains somewhat uncertain regarding the outcome of the Iran War and the outlook for AI investment. We remain confident, however, that the Fed will continue tightening policy in the near term, implementing an additional 50bp of rate hikes through Q1 2027. If the midterm elections result in finding closure on the Iran War and/or the paring back of AI investment, the Fed might not need to tighten policy any further after March."

"With the changing political landscape, Warsh might turn more hawkish just as the Committee shifts more dovish next year. The outcome of the Iran War and the outlook for AI investment will determine how much tightening the Fed needs to implement. We still look for 50bp of further rate hikes."

"Less acute political pressures on the Fed might allow for turnover in the Committee. Powell might finally decide to retire. The risk is that Trump does not appoint replacements, letting the Fed run understaffed."

"While the AI trade, debt ceiling, fiscal policy, and bank regulation will be closely watched, we expect markets to re-focus on macro fundamentals as inflation remains too high, and the economy remains firm. This could keep both rates and volatility elevated."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Learn more.)