The Fed's implicit promise to ease monetary policy in order to sustain economic growth -- as long as inflation remains muted -- stands as a strong positive for the stock market. However, some profit-taking could weigh on the market this week after the market rallied ahead of and on Fed Chair Powell's speech in which he finally confirmed a September rate cut -- a "buy the rumor sell the fact" pattern. The market will probably now focus on whether and by how much the Fed will cut rates after the September FOMC meeting. With the Fed now emphasizing risks to economic growth, real-side economic data should become more important than inflation data.
Inflation data are still important, nonetheless, as they need to confirm their downtrend to satisfy the Fed and markets. The consensus expectation of 0.2% for both Total and Core July PCE Deflator, due on Friday, should be acceptable and taken in stride. Stocks would likely rally on a smaller increase. The latter can't be ruled out.
The Fed's policy stance should restrain any downside risk stemming from policies of a new Administration, whether it be Democratic or Republican. Many of the proposals relate to re-distribution rather than economic growth. So, they may have little significance for monetary policy. However, some policy proposals could be significant for the Fed at some point.
The Democratic proposal to hike the corporate tax rate may have macroeconomic effects. If the tax reduces profits, it could dampen business investment as some projects become unprofitable. If the tax is passed through to prices, there would be a temporary boost to inflation that would cut consumer purchasing power. If the tax is pushed down to labor, resulting in lower-than-otherwise wages, consumer purchasing power would be hurt, too. However, if, as theory says would happen, workers in non-corporate businesses also receive lower-than-otherwise wages, these companies could pass through the lower labor costs to prices, offsetting at least to some extent the hit to purchasing power from the tax.
Harris' plan to extend Biden's cap on drug prices would seem to help hold down inflation. However, it may prompt pharmaceutical companies to raise prices on other drugs. Also, it could lead to shortages and higher prices through a black market for the capped drugs.
The Republican proposal to hike tariffs should boost prices, at least initially. In principle, however, they should be offset by a stronger dollar so the boost may be less than expected. Whether tariffs result in only a one-time increase in prices or feeds into a sustained increase in inflation may depend on whether wage rates move up in response. This won't be seen immediately, but could make Fed policymakers cautious about the inflation outlook.
Trump's wish to participate in Fed rate decisions is not good. Participation by a president risks preventing the Fed from tightening to prevent inflation, a politically unpopular policy. This risk could undermine global confidence in the dollar, causing the latter to fall in the FX market. This would be inflationary. Between a loss of confidence in the Fed's inflation-fighting ability and a weaker dollar, inflationary expectations would rise, resulting in a steeper Treasury yield curve (higher long-term yields) -- a negative for economic growth.
Both parties appear to want to increase the Child Care Credit. This would boost consumer spending. And, unless it leads to a significant increase in labor force participation, would need to be "crowded out" either by market moves or Fed policy if the economy is close to full employment.
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