Fed rate cut on collision course with 2024 election politics

The Federal Reserve is set to cut interest rates by at least a quarter of a percentage point Wednesday, putting the politically independent agency in the crosshairs of a heated election in which inflation and economic pains have been central issues.

Fed Chair Jerome Powell has taken blows from both sides of the aisle for months. Some Democrats, including Sen. Elizabeth Warren (Mass.), have pushed for aggressive rate cuts , while former President Trump has accused Powell — the longtime Republican he appointed in 2017 — of potentially cutting rates to help Democrats in the 2024 election.

Skanda Amarnath, executive director of Employ America and former analyst at the New York Fed, ultimately does not anticipate a rate cut “being make or break for the election.”

“It’s a kind of a conspiratorial or sexy idea in the abstract, but it doesn’t really cash out,” he said.

JJ Kinahan, CEO of IG North America and president of the online retail brokerage tastytrade, also did not expect rate cuts to have “a big impact on the election, other than a talking point for candidates.

“It normally takes a rate change approximately six months to work its way through the economy,” Kinahan noted.

But a “strong market and economy is good for the incumbent,” Commerce Street Capital CEO Dory Wiley said, adding that the “market wants to run on rate cuts.”

“It’s priced in 25 [basis points], but if it’s more like 50 or the 75 [basis points] Democrats are calling for, there would be a strong rally into the election, which would be good for Harris and Democrats,” Wiley said.

Powell has said time and time again that the Federal Open Market Committee (FOMC), the central bank panel responsible for setting monetary policy including interest rates, will make decisions based solely on economic data and disregard political rhetoric. And historically, the Fed has been loath to take actions that could be perceived as influencing an election.

Stephen Kates, principal financial analyst for RetireGuide and a former wealth management adviser, predicted Powell and the Fed “are likely gritting their teeth through this rate cut, given that they absolutely want to avoid the stain of partisanship.”

“No matter what they do, they will be criticized as being in the pocket of one party or the other. However, their duty is to act in the best interest of the country and the economy,” Kates said.

But Amarnath argued that rate cuts before an election “are not as historically unprecedented.”

The last time the FOMC cut borrowing costs during the two months preceding a presidential election was during the 2008 financial crisis. Before that, the FOMC cut rates during this period in 1992 and 1984.

“We have a moment where interest rates are relatively high compared to recent history — pretty clearly restrictive by most beneficials — so a more aggressive move might make more sense up front,” Amarnath said.

The Fed has held rates at a 23-year high range of 5.25 percent to 5.5 percent since last July, hiked incrementally from near zero in March 2022 as pandemic-induced inflation soared to a 9.1 percent peak in June 2022.

September has been the likely target for a first cut for some time, especially after sticky inflation data this spring fell below 3 percent over the summer for the first time since March 2021.

Powell sealed the deal last month during a speech from Jackson Hole, Wyo., saying the “time has come” for rate cuts as inflation cools and hiring and job gains slow.

Inflation dipped to 2.5 percent year-over-year last month, within striking distance of the Fed’s 2 percent target. The unemployment rate has also crept up to 4.2 percent from a 3.4 percent low last year — low by historical standards but a sharp jump in a short period of time.

While presidents have no control over the FOMC’s monetary policy positions, voters are highly attuned to the burden of inflation and high borrowing costs, which have coincided with higher household debt and an uptick in delinquencies reported by the New York Fed.

Republicans have hit Democrats over high inflation in the wake of the pandemic, while Vice President Harris accused Trump of leaving the Biden administration a “mess” during the presidential debate last week.

When he was in office, Trump publicly bashed Powell and the Fed and pressured him to cut rates for political reasons, shattering decades of decorum dictating communication between the White House and the independent central bank.

The Republican presidential nominee said last month that he “made a lot of money” so he should “have at least a say” over monetary policy such as interest rates.

Trump appeared to soften his stance during an interview with Bloomberg, saying, “I think it’s fine for a president to talk. It doesn’t mean that they have to listen.”

In February, Trump accused Powell of being “political” and suggested he would cut rates to help Democrats during the 2024 election.

“I think he’s going to do something to probably help the Democrats, I think, if he lowers interest rates,” Trump said in an interview with Fox News Business. “It looks to me like he’s trying to lower interest rates for the sake of maybe getting people elected, I don’t know.”

In response to The Hill’s requests for comment from the Trump campaign, Republican National Committee spokesperson Anna Kelly attacked the impact of “Kamalanomics” on mortgage rates, which track closely with interest rates set by the Fed, and said “only President Trump can restore economic growth after four years of failure.”

Kelly also said Trump would “declare a national energy emergency to quickly bring down mortgage and interest rates.”

President Biden predicted in March that Americans would see “those rates come down more” by the end of the year, which New York Magazine likened to a polite nudge from the president. But Biden and Harris have largely refrained from publicly pressuring Powell, with Democrats in Congress running offense instead.

Nearly two dozen progressive Democrats from the House and Senate called for rate cuts in March, arguing “excessively contractionary monetary policy needlessly worsens housing market imbalances and the unaffordability of home ownership, creates risks for banking stability, and could threaten the achievements of strong employment and wage growth and its attendant reductions in economic and racial inequalities.”

Warren along with Sens. Sheldon Whitehouse (D-R.I.) and John Hickenlooper (D-Colo.) pressed Powell on Monday to cut rates by 75 basis points, a highly unlikely move that exceeds the 50 basis point cut forecasted by most interest rate traders, according to the CME FedWatch tool .

“It is clearly the time for the Fed to cut rates. In fact, it may be too late: your delays have threatened the economy and left the Fed behind the curve,” the lawmakers wrote.

Amarnath put the odds of a 75 basis point cut Wednesday at “zero,” and Kates called it “next to impossible.”

“Cutting 75 [basis points] all at once would demonstrate that the Fed is frantically trying to catch up after being behind the curve. Firstly, this would be an admission of getting it wrong, which they are unlikely to do. Second, this would create some surprise from the market and likely be interpreted as a bearish sign for the economy,” Kates said.

“The Fed wants to maintain calm and orderly easing, not establish a campaign of shock and awe,” he added.

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