Evercore on how the Fed will adjust if Trump wins

With former President Trump gaining momentum in the polls, Evercore ISI analysts outlined how the Federal Reserve might navigate the potential economic shocks of a Trump victory in a note Friday.

According to Evercore, the Fed is focused on maintaining a strategic stance that would leave it "well positioned" for a range of scenarios by mid-2025.

Despite the potential pressure from Trump to delay interest rate cuts, Evercore ISI analysts believe that "Trump jawboning will not dissuade the Fed from cutting in September," though it underscores the importance of the Fed methodically explaining its reasoning.

They assert that there is a "near-zero chance of a July cut" given the current climate.

Looking ahead, the firm notes the Fed plans to stay focused on inflation and employment data in the near term, without adjusting its baseline outlook based on speculative impacts of possible Trump policies.

"This far out, actual policies and their impacts net of changes in confidence and risk premia are too hard to predict, and it would be institutionally risky," the analysts note.

However, they acknowledge that private sector behavior and financial conditions reflecting expectations of Trump shocks will be considered.

Starting in December, if Trump wins, the Fed staff will cautiously incorporate estimates of Trump policies into their forecasts, supplementing with scenario analysis.

"Fed updating will likely move more slowly than private sector thinking," says Evercore. They believe this could create a disconnect between market expectations and the Fed's Summary of Economic Projections (SEP).

In essence, Evercore ISI foresees a strategic, cautious approach by the Fed, aiming to avoid sudden, drastic changes.

They predict a possible "saucer-shaped rate path in 2025 under Trump," with gradual adjustments to avoid the need for deeper cuts followed by significant hikes.

This approach, according to Evercore ISI, would help the Fed maintain stability and flexibility in an uncertain political and economic landscape.