The Federal Reserve will meet just two more times between now and the November elections . The big questions are whether the Fed will cut interest rates and how it will affect the presidential showdown.
It has been a year since the Fed changed its interest rate target in any way. In July 2023, the Fed raised rates from 5.25% to 5.50%. The current level is presumably the zenith of the central bank’s historic tightening cycle, which began in reaction to the worst inflation in generations, amid the COVID-19 pandemic.
But now, 28 months after interest rates began rising, the Fed is eyeing rate cuts. In one of the most contentious election years in modern history, rate changes will undoubtedly be looked at through a political lens. President Joe Biden is facing a tough challenge from former President Donald Trump, who has made the public's poor approval of Biden’s stewardship of the economy one of the defining issues on the campaign trail.
Lower interest rates are good for consumers. The higher interest rates have, on top of inflation, made things such as buying a car or a home more expensive. They also make it more difficult to pay off credit card debt, so any downward movement in the Fed’s interest rate target would be good news for consumers.
“Higher interest makes things more expensive mortgages, loans, things like that,” Peter Loge, director of the George Washington University School of Media and Public Affairs, told the Washington Examiner. "And voters, people like you and me, don't like that right now."
Right now, the most likely scenario is that the Fed only conducts one interest rate cut before the November elections, according to sentiment among investors. The Federal Open Market Committee, which controls interest rates, has meetings set for July and September, although most expect the central bank to hold rates steady this week before cutting in September.
Investors, as of July 17, are pricing in about a 95% probability that the Fed will cut interest rates in September, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed. There are about 1-in-20 odds that the Fed conducts two interest rate cuts before the election.
But voters likely won’t feel much from just one rate decrease. The Fed will most likely drop rates by only a quarter of a percentage point when it decides to finally cut. That just makes a dent for consumers.
“Interest rates took the elevator going up, but they're going to take the stairs coming down,” Bankrate chief financial analyst Greg McBride told the Washington Examiner. “So, you know, with one rate cut, whether it's a quarter-point or even a larger half-point, that still pales in comparison to how much rates went up in 2022 and 2023.”
McBride said it provides very little immediate relief for borrowers. He also pointed out that years of combined inflation are weighing heavily on voters’ budgets.
“The cumulative price increases that households have felt over the last several years are not going to be reversed,” McBride said. “So even with interest rates coming down, household budget pressures are going to persist until income can fully catch up and restore the buying power households had a few years ago.”
The timing of the rate cuts is also key for the election. If the Fed decides to cut earlier at its July meeting, that would give more time for voters to digest the fact that rates are moving lower, according to Loge.
“If the Fed cuts rates in September, which seems more likely, that's probably not as good for the president, because by then, more people will have made up their minds about who they are going to vote for,” Loge said.
Loge said that either way, it is more about being able to tell a story to voters.
"Biden wants to tell the story that the economy is getting better, that our border is getting more secure, our markets are going up, wages are going up, and inflation is moving down, and the Fed cutting rates helps tell that story,” Loge said. “The sooner you can tell that story, and the more facts you can have behind that story, the better for President Biden.”
Fed Chairman Jerome Powell has been careful not to speak with any certainty about what the Fed might do with interest rates, although he has noted that inflation has been gradually returning to earth after peaking at about 9% during Biden’s presidency, according to the consumer price index.
Annual CPI inflation, the most common measure of price growth, has fallen to 3% as of June. That is much lower than its zenith but still a full percentage point above the Fed’s 2% long-run goal.
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Powell has also indicated that it might take quite a while for inflation to return to that 2% level, well into the next presidency .
“You know, we don’t see ourselves getting back to 2% inflation this year or next year, well, maybe late next year, but in the year after,” Powell said during a recent event in Portugal. “The main thing is we’re making real progress.”
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