The Federal Reserve is set to cut interest rates by at least a quarter of a percentage point on Wednesday, putting the politically independent institution in the crosshairs of a bitter election in which inflation and economic pain are central issues.
Fed Chairman Jerome Powell has faced criticism from both parties for months. Some Democrats, including Sen. Elizabeth Warren of Massachusetts, have called for aggressive rate cuts, while former President Donald Trump has accused Powell, a longtime Republican whom he appointed in 2017, of potentially cutting rates to help Democrats in the 2024 elections.
Skanda Amarnath, executive director of Employ America and a former analyst at the New York Fed, doesn't expect rate cuts to ultimately “make or break the election.”
“It's kind of an intriguing or attractive idea in the abstract, but it's not actually profitable,” he said.
JJ Kinahan, CEO of IG North America and president of online retail brokerage TastyTrade, also said he doesn't expect the rate cuts to have “a significant impact on the election other than as a talking point for the candidates.”
“It typically takes about six months for interest rate changes to have an impact on the whole economy,” Kinahan noted.
But “it's good for this administration that the markets and economy are doing well,” said Dorie Wiley, CEO of Commerce Street Capital, adding that “the market wants lower interest rates.”
“It's on sale for $25. [basis points]If it's close to 50 or 75 [basis points] “There will be a strong rally going into the election, as Democrats want, and that will be good for Harris and the Democratic Party,” Wiley said.
Powell has repeatedly said that the Federal Open Market Committee (FOMC), the central bank committee responsible for setting monetary policy, including interest rates, will make decisions based solely on economic data and ignore political rhetoric, and the Fed has historically been reluctant to take any action that could be seen as influencing elections.
Stephen Cates, chief financial analyst at Retire Guide and a former financial adviser, predicted that Chairman Powell and the Fed “will likely grit their teeth and tackle this rate cut because they desperately want to avoid the taint of partisanship.”
“No matter what they do, they're going to be criticized for being in the pocket of one party or the other, but their duty is to act in the best interest of the country and the economy,” Cates said.
But Amarnath argued that a rate cut ahead of an election “is not unprecedented in history”.
Last FOMC Meeting Reduce borrowing costs The most interest rates were cut in the two months before a presidential election was during the 2008 financial crisis. Prior to that, the FOMC had cut rates during this period in 1992 and 1984.
“Interest rates are relatively high compared to recent years and are clearly restrictive for most beneficiaries, so a more aggressive move may make sense initially,” Amarnath said.
The Fed has kept interest rates steady at a 23-year high of 5.25% to 5.5% since July last year, gradually raising them from near zero in March 2022 as pandemic-induced inflation surged to a peak of 9.1% in June 2022.
September has been earmarked for some time as the likely target for the first rate cut, especially after inflation data this spring showed it falling below 3% over the summer for the first time since March 2021.
Powell reached the agreement last month in a speech in Jackson Hole, Wyoming, saying that with inflation subsiding and job and employment growth slowing, “the time has come to lower interest rates.”
Inflation fell to 2.5% year-on-year last month, close to the Fed's 2% target, and the unemployment rate rose to 4.2% from a low of 3.4% last year — a historically low rate, but a sharp increase in a short space of time.
Although the president has no control over the FOMC's monetary policy position, voters are very sensitive to the burden of inflation and high borrowing costs, which Rising household debt and arrears The New York Fed reported.
Republicans have blamed Democrats for high inflation in the wake of the pandemic, while Vice President Harris, during last week's presidential debate, accused President Trump of “messing up” the Biden administration.
During his presidency, Trump openly criticized Chairman Powell and the Fed, pushing them to cut interest rates for political reasons and destroying decades of courtesy that governs communication between the White House and the independent central bank.
The Republican presidential candidate said last month that he has “made a lot of money” and “should at least have a say” on interest rates and other monetary policy.
In an interview with Bloomberg, Trump appeared to soften his stance, saying, “I'm fine with the president talking. But that doesn't mean the president has to listen.”
President Trump in February accused Powell of being “political” and suggested he would cut interest rates to help Democrats in the 2024 elections.
“I think if he lowers interest rates, he's probably doing something to help Democrats,” Trump said in an interview on Fox News Business. “It seems to me like he's trying to lower interest rates maybe to get elected, but I'm not sure.”
In response to The Hill's request for comment from the Trump campaign, Republican National Committee spokeswoman Anna Kelly criticized the effect of “Kamaranomics” on mortgage rates, which are closely tied to interest rates set by the Fed, and said, “After four years of failure, only President Trump can restore economic growth.”
Kelly also said President Trump “will declare a national energy emergency to get mortgage and interest rates down quickly.”
President Biden predicted in March that Americans would see “these rates fall even further” by the end of the year. New York Magazine is But Biden and Harris have largely refrained from publicly pressuring Powell, leaving congressional Democrats to go on the offensive instead.
In March, nearly two dozen progressive Democrats in the House and Senate called for lowering rates, arguing that “excessively contractionary monetary policy could unnecessarily exacerbate housing market imbalances and homeownership difficulties, pose risks to bank stability, and jeopardize the progress made on strong job and wage growth and associated reductions in economic and racial inequality.”
Warren, along with Sens. Sheldon Whitehouse (D-Idaho) and John Hickenlooper (D-Colorado), urged Powell on Monday to cut rates by 75 basis points, a highly unlikely move beyond the 50 basis point cut most interest rate traders expect, the committee reported. CME FedWatchTools.
“It is clearly time for the Fed to cut interest rates. In fact, it may be too late. Your delay has endangered the economy and rendered the Fed obsolete,” the lawmakers wrote.
Amarnath said there was “zero chance” of a 75 basis point cut on Wednesday, while Cates said it was “almost impossible.”
“Below 75 [basis points] “Doing all of this at once would signal that the Fed is desperately trying to catch up after falling behind. First, it would be an admission of mistake, which the Fed is unlikely to do. Second, it would surprise markets and would likely be interpreted as a bearish sign for the economy,” Cates said.
“The Fed wants to maintain calm and orderly monetary easing rather than engage in a shock-and-awe campaign,” he added.
