Investors are concerned that the upcoming election might interfere with policy decisions. Here’s why our view is different.----- Transcript -----Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley. Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Matthew Hornbach: And on this episode of the podcast, we'll discuss whether the election will change Fed policy this year. It's Thursday, January 25th at 10 a.m. in New York. Matthew Hornbach: All eyes are on the Fed as 2024 gets underway. Investors are concerned not only about the timing and the magnitude of the expected rate cuts this year, but also on the liquidity in the funding markets, which is intricately linked to the Fed's ongoing quantitative tightening operations, or QT. Seth, let's dig right into it. Does the outcome of the US presidential election in November change your team's baseline view that the Fed will lower rates starting in June? Seth Carpenter: Matt, I think the short answer to your question is no. So our baseline forecast is, the Fed starts cutting rates in June. And over the second half of the year, it gets a total of 100 basis points worth of cuts in. But that forecast is predicated on the downward trajectory for inflation and the economy's slowing but not falling off of a cliff, or put simply, it's based on the Fed following their statutory objectives for stable prices and full employment, and not the political cycle. Matthew Hornbach: So, Seth, we often hear from investors that they believe that the election will have an impact on Fed policy and we also hear from FOMC participants from time to time about this topic. But why is it that FOMC participants dismiss this wisdom or conventional wisdom amongst investors that the election might interfere with Fed policy? Seth Carpenter: I think that question has a really simple answer, which is that the FOMC participants, they're the ones sitting around the table making the decisions, and they don't see themselves as being influenced by the politics. I mean, I can say I was at the Fed for 15 years. I was a staffer preparing memos, doing briefings to the committee in the 2000 election, the 2004 election, the 2008 election, the 2012 election. And I can honestly say from my firsthand experience, there really wasn't anything about the fact of the election that was doing anything to influence the way that monetary policy was being decided. Their eyes were fixed on those statutory objectives of full employment and stable prices. But let me turn it around to you, Matt, because I know that you did a lot of homework. You went back through the historical record and you looked at policy decisions in years when there were elections, in years when there weren't elections. When you do that really careful analysis, what comes out of that pattern? What do you see in the policy decisions that the committee took? Matthew Hornbach: Absolutely. We looked at actual policy rate changes going all the way back to 1971. So really getting in that period of time when inflation was also a problem in the 1970s and early 1980s. And we went all the way through the present day. And what we found was that the Fed doesn't shy away from changing policy, whether it be an election year, a general election year, a midterm election year or no election in a given year. They change policy all the time. You know, then we looked at, well, does the policy changes that occur in election years or non election years, does it differ in notable ways? Does the Fed tend to cut rates more in election years or hike rates more in non election years? And we didn't find any notable pattern at all. It just became very apparent in the data that we looked at that there isn't a political bias in terms of the policy rate, whether to change it or not, change it, to move it up, to move it down. The Fed seems, based on the data, to act in the best interest of what's going on in