The Federal Reserve’s first interest rate cut in four years coincides with another crucial four-year event: the home stretch of the presidential election.
Fed Chairman Jerome Powell downplayed the central bank’s role in the race between Vice President Kamala Harris and former President Donald Trump on Wednesday when he announced a half-percentage point cut in the benchmark interest rate. But that didn’t stop the candidates’ campaign teams from voicing their opinions, and it could prove to be a deciding factor for voters.
“This is my fourth term at the Fed, and it’s always the same. We always go to this meeting and ask what is right for the people we serve,” Powell said. “Nothing else is ever discussed.”
The decision to cut interest rates for the first time during the Biden administration suggests that the Federal Reserve Board of Governors believes the economy has overcome the wave of inflation triggered by the COVID-19 pandemic that has plagued it since mid-2021. The Fed raised its benchmark interest rate 11 times between March 2022 and July 2023.
Inflation peaked at 9.1% in June 2022. The Consumer Price Index, a measure of inflation, rose 2.5% in August last year, according to the latest release from the Bureau of Labor Statistics. The unemployment rate was 4.2% in August, up from 4.3% in July, but still much higher than 3.5% in July 2023, when the Fed made its last rate hike.
“We now believe that the risks to achieving our employment and inflation goals are roughly balanced, and we recognize the risks on both sides of our dual mandate,” Powell said.
Wednesday’s cut was the first in a series of rate cuts. The key rate currently stands at 4.75 to 5%.
One Fed board member, Michelle Bowman, disagreed with the rest of the group. It was the first time since 2005 that a governor had expressed that opinion. Bowman favored a cut of 25 basis points – or a quarter of a percentage point.
Timing of the interest rate cut
Both campaigns responded quickly to the Fed’s news.
Trump said in a crypto-themed bar in New York that the cut should have been lower.
“I guess it shows that the economy is in very bad shape when they cut that much, assuming they’re not just playing politics,” the Republican candidate said. “Either the economy is in very bad shape or they’re playing politics, one or the other. But it was a big cut.”
Harris appeared forward-looking in a prepared statement.
“While this announcement is welcome news for Americans who have borne the brunt of high prices, my focus is on the work ahead to continue to bring prices down,” the Democratic candidate said. “I know prices are still too high for many middle-class and working-class families.”
Sarah Binder, a senior fellow for governance studies at the nonpartisan Brookings Institution and author of “The Myth of Independence: How Congress Governs the Federal Reserve,” said there is a long history of presidents putting pressure on the Fed, from John F. Kennedy to Richard Nixon to Trump, both as president and now as a presidential candidate.
In order for the Fed to effectively fulfill its task of keeping the economy going, it must be trusted as legitimate, said Binder. And its political support depends on it doing a good job.
“The Fed does not have the freedom to sit back and do not do enough. This can also put it in the crosshairs of politicians, where it really, really does not want to be,” she said.
Skanda Amarnath, executive director of Employ America, a research group that advocates for full employment, said the Fed should examine the economic data.
“That’s what they should be paying attention to, not where they are in the election cycle,” she said. “I think that’s broadly the case. I don’t see anything here that would be just real politicization.”
What a Fed interest rate cut means for the economy
Many economists and economic advisors have argued that the Fed should cut interest rates over a period of months to avoid significant damage to the labor market and, in the worst case, a recession.
Now consumers can expect lower costs when borrowing money to buy homes, cars and other necessities.
Kitty Richards, senior policy adviser at Groundwork Collaborative, a progressive think tank based in Washington DC, said the Fed should not hold back on cutting interest rates as inflation eases.
“When inflation rose, the Fed made four consecutive rate hikes of 70 basis points each. There is no reason why it should be deterred from normalizing rates now that inflation is under control,” she said.
Because homeownership accounts for such a enormous portion of inflation, Richards has expressed concern that maintaining current interest rates has driven mortgage rates so high that the housing market is unaffordable for many Americans. This, in turn, affects inflation, she said, creating a vicious cycle.
Dean Baker, senior economist at the Center for Economic and Policy Research, a progressive economic policy think tank, said the Fed’s decision was a good sign for the housing market.
“It is good that the Fed has now recognized the weakening labor market and responded with aggressive tapering. With virtually no risk of a resurgence in inflation, the greater strengthening of the labor market is largely free,” Baker said in a statement. “It will also help boost the housing market, where millions of people have put off selling their homes because of high mortgage rates.”
