Election 2024: Inflation Outlook

Apr 17, 2024

It’s too early to predict the results of the election on inflation and the broader economy, but there are three areas investors should watch.

Michael Zezas
Seth Carpenter

Key Takeaways

  • As inflation persists, the Fed is now likely to wait until July to cut rates. 

  • Immigration and the deficit are two critical election issues that could have an impact on inflation. 

  • Investors should consider the possible outcomes of the 2024 election in understanding the inflationary environment.  

Americans have no shortage of issues to consider as the 2024 U.S. presidential election draws closer. In particular, some investors are considering how the next occupants of the White House and Congress might make fiscal policy choices around boosting or cutting taxes and spending, which could have a direct impact on 2024’s other big story—inflation. 


The Federal Reserve has tried to map out interest rate cuts under the assumption that inflation will finally come under control. However, growth and the labor market have remained robust. Indeed, based on recent economic data, Morgan Stanley Research has revised our forecast for U.S. economic growth from 1.9% to 2.3% for 2024 and 1.4% to 2.1% for 2025. As a result, the Fed is likely to make the first cut of this rate cycle—previously anticipated for June—in July, followed by two additional 25 basis point cuts at the end of the year. In 2025, Morgan Stanley expects to see the Fed take rates down at each meeting through June to reach 3.625%. 


Beyond rates, the confluence of issues that are affecting the U.S. macroeconomic picture are sure to provide ample fodder for the campaign trail and the debate stage—but they could also shape real decisions that have a long-term impact on inflation. While it’s still too early to gauge the election’s outcome on the macro picture, there are three things investors should keep in mind. 


Deficit Scenarios: Record levels of government spending in response to the COVID pandemic preceded the current inflationary environment—but would increased spending, with an expansion of the deficit, have the same impact following the upcoming election? In the scenario of a Democratic win of the White House and Congress, a mix of expanded social spending and extension of some expiring tax cuts are likely to be offset with tax increases. As a result, we estimate that the deficit would expand by approximately $450 billion over 10 years, or at most $40 billion to $50 billion in the first year, with the impacts felt in the economy likely not until late 2025 or early 2026. Alternately, Republican control of the executive and legislative branches may bring lower taxes with limited sources of new revenue. The potential for extension of most expiring tax breaks could contribute to a $1 trillion increase in the deficit over 10 years, or about $100 billion to $150 billion in the first year, in our view. However, that marginally larger deficit isn’t likely to have a significant impact on inflation, due to lags and restrictive monetary policy that would, for instance, keep corporate spending in check. 


Immigration & Inflation: Immigration is sure to remain a fraught topic on the election trail, with debates swinging between the upside to economic growth from the influx of new participants in the economy and workers in the labor force, to burdens on local and federal infrastructure and resources. But what is the likely impact for inflation of changes in immigration policy? The Congressional Budget Office (CBO) estimates that 3.3 million people will immigrate to the U.S. in 2024, roughly in line with 2023, with adults of prime working age making up a large portion of this population. This immigration flow helped expand the economy and labor market. With CBO estimates indicating that an immigration surge that began in 2022 will level off in 2026 to pre-COVID trends, we think any policy reaction from a potential Republican administration would have a negligible effect on inflation. 


Fed Independence: With investors waiting with bated breath for the Fed’s next policy moves, it’s easy to understand why the expiration of Chair Jay Powell’s term in January 2026 is another key topic of conversation regarding election impacts. The Fed is usually described as a “quasi-independent government agency,” but to lead the central bank or be on its board requires a presidential nomination and Senate confirmation—meaning that the winners of the next election will determine the next chair of the Fed. An independent Fed is likely to endure, particularly since any change in its authority would require an act of Congress, which has found it more difficult to take on major legislation, as brinksmanship with the debt ceiling and government shutdowns have shown. The continuing independence of the Fed should mean it will fulfill its duty to keep inflation in check without considering politics, and we think the risk for a wholesale shift in monetary policy is overstated.