Is the Fed buying time until the elections are over?

Throughout the current political term, the Federal Reserve and America’s aligned mainstream news have been telling the world how the US economy is doing just fine. After all, US indices are at, or near, all-time highs. US stocks are dominating, and USD remains strong too. Life must be great for Americans… right?

Not everyone agrees. Whispers within the financial community imply that the Fed is in deep trouble, desperately treading water until election day, trying to keep things looking stable on the surface to support the current administration.

The so-called conspiracy theorists suspect that shortly after election day, new economic troubles will come to light. And when the truth is revealed, investors will drop US assets like a hot potato.

It’s a doom and gloom prediction and a scary scenario for economists, but it’s also a massive market indicator that we traders shouldn’t ignore. If such a prediction were to come true, traders would have a wide variety of assets to short.

It all sounds quite apocalyptic, but is there any weight to the suspicions?

High interest rates, persistent inflation

The Fed has been hiking interest rates all year to fight inflation. Usually, higher rates mean less borrowing and spending, which should cool down inflation. And yet, inflation remains high at 5.5%. Consumer prices keep climbing, and the previous rate hikes are still not doing the trick. This unusual situation has folks wondering if the Fed's strategy is nothing more than a distraction buying time.

The debt default dilemma

Now, let's talk about the national debt. It's nearing a whopping $35 trillion and could hit $36 trillion by the end of the year. Those high interest rates make it very expensive to service this debt, squeezing the federal budget.

More money going to interest payments means less for things like infrastructure, education, and healthcare. If the Fed raises rates or keeps them high, the debt could become unmanageable, which is the main reason a debt default rumor is circulating.

The Fed has done nothing to reduce the dead over the last four years and says its only plan is to maintain low interest rates, simplify the tax code, and make modest debt-reduction outlays–none of which will dent or even scratch the spiraling debt crisis.

When speaking with open-minded economists, nobody can suggest a solid plan that could significantly reduce the national debt, which is currently costing the Fed approximately $868 billion per year. No surprise that conspiracy theorists forecast a debt default. I also struggle to imagine another way out for the Fed.

Political pressure and economic realities

There's also political pressure. Some think the Fed is trying to keep things stable until the election to avoid rocking the boat. Former President Donald Trump has been vocal about not wanting rate cuts before the election. Fed officials, like Chair Jerome Powell, insist they're making decisions based on data, not politics. But the timing of any potential rate cuts has people questioning just how independent the Fed really is.

Donald Trump will probably become the 47th President of the United States of America. A post-election economic crisis could be brutal—high interest rates, stubborn inflation, and a crushing national debt could create an economic storm. This would pressure the new administration to fix the situation, and without the tools or sufficient resources available, Trump’s people won’t have any universally accepted solutions, no matter their experience of good intentions.

Key indicators to watch

So, what should we monitor? It’s very precarious to assume the Fed and the media are unbiased. Here are a few key indicators to consider monitoring, but beyond market sentiment, it's unclear if the figures are indicators of economic strength:

1. Watch for any changes in tone or unexpected policy shifts from Fed officials.

2. Keep tabs on GDP growth, unemployment rates, consumer spending, and inflation data.

3. Pay attention to political discourse around the Fed and economic policy.

4. Monitor the adoption rate of alternative reserve currencies.

Conclusion

While the Fed might try to keep things stable until election day and possibly beyond, we can't ignore the underlying economic challenges that the US faces. Given the lack of immediate and near-future solutions, it might be fair to say the Fed needs a radical change to the situation to get out of the red and back to black.

The idea of the US defaulting on its debt is not so difficult to imagine, especially when you consider how Nixon defaulted and broke the gold standard. But a national debt default is a parachute, only to be used when the economy is crashing and burning, and neither the Democrats nor the Republicans want that.

As for the election being some kind of trigger for a market crash, don’t believe the hype. The election is in November, but the chief Justice won’t swear in the winner until 20 January 2025. So which date would trigger the fall and why? Market sentiment is the only mechanism capable of moving markets without fiscal reasoning.

So, if you were planning on trading USD and US-related assets around election time, expect plenty of volatility, but very little to affect the long term, unless the winner makes a shocking announcement. As a trader, you’d be wise to follow the elections closely and dig deep into anything that could trigger a sentiment shift. Don’t rely solely on economic data or media reports for this one.