The Federal Reserve may want to stay out of the spotlight of the U.S. presidential election as a new set of forecasts shows it is unlikely to cut interest rates before Election Day.

The Federal Reserve on Thursday kept its benchmark interest rate unchanged at 5.25%-5.50%, where it has remained since July last year.

The forecasts they released also show they are more hesitant than before to start cutting interest rates. High borrowing costs make it more expensive for Americans to buy everything from washing machines to cars to houses on credit, a situation that has led to persistent pessimism among U.S. consumers about Biden.

As recently as March, Fed officials were predicting interest rates would be cut by 75 basis points this year, an outlook that would imply rate cuts starting this summer and continuing until the Nov. 5 presidential election. That could expose the Fed to criticism that it is swaying a rematch between Biden and former President Donald Trump.

But now, with inflation higher than expected and the job market still strong, officials have abandoned that forecast and expect just a quarter-point rate cut this year, an outlook that suggests the Fed is unlikely to take any action before its final meeting in December.

Investors, for their part, have not completely given up hope for an early rate hike, which would keep the Fed in the spotlight during the U.S. presidential election. The interest rate futures market still sees about a 60 percent chance of a rate cut in September.

The Fed's rate cuts could improve consumer sentiment, which would be good for Biden. Trump had already "spoken out" earlier this year, saying, "I think (Fed Chairman Powell) might do something that would be good for the Democrats. It seems to me that he's trying to lower interest rates, maybe to get someone elected, I don't know."

The Fed's delay in cutting interest rates until after the election could work against Biden, who scores poorly on his handling of the economy despite near-record low unemployment, record household wealth and above-trend economic growth, according to polls.

"This is obviously bad news for the Biden campaign, which has been desperately trying to convince voters that Bidennomics has the U.S. economy in good shape," said Republican consultant Jeanette Hoffman.

Asked about the shift, White House press secretary Jean-Pierre said the administration had no comment. “We’ve been very clear about the Fed’s position. They’re independent. We don’t comment on the Fed.”

"After four years of rampant inflation that has hurt families from grocery stores to gas stations, Americans are confident that President Trump can fix our economy and put more money back in their pockets, just as he did during his first term," said Karoline Leavitt, national press secretary for the Trump campaign.

It's not the first time that a rate cut coincides with an election year

It is not unheard of for the Federal Reserve to cut interest rates in an election year, but it is relatively unusual. The most recent one happened in 2020, when Trump was president of the United States and the Federal Reserve led by Powell lowered interest rates to near zero in response to the sudden outbreak of the new crown epidemic. But in November of the same year, Trump still lost to Biden.

In addition, the most recent one occurred in the fall of 2008, when the financial crisis was breaking out, the Federal Reserve led by Bernanke cut interest rates several times, and Democratic presidential candidate Obama and Republican presidential candidate McCain were competing for the White House, and Obama eventually won.

In 1992, faced with rising unemployment, Alan Greenspan’s Fed cut interest rates several times in the months leading up to Election Day. Republican George H.W. Bush lamented that the Fed’s response was “too little, too late” and blamed it in part for his defeat to Democrat Bill Clinton.

"I thought if interest rates had been cut more, I might have been re-elected president because our recovery would have been more pronounced," Bush said in a 1998 interview. "I reappointed him, and he let me down."

Interest rate cuts still uncertain

To be sure, conditions could change enough in the coming months to prompt the Fed to cut rates at its mid-September meeting, seven weeks before the election, though not necessarily in a way that would favor Biden.

Powell laid out two scenarios for starting to cut interest rates at his news conference Thursday: Either the Fed becomes more confident that inflation is continuing to slow toward its 2% target, or there is an "unexpected deterioration" in labor market conditions.

If the trigger for the Fed to cut rates is the former, that could bode well for Biden. If it’s the latter, it could be a boon for Trump.

Powell said if we see "uncomfortable weakness in the labor market that exceeds expectations," a rate cut could come sooner than currently forecast. "We fully understand the risks, but that is not our plan."

The article is forwarded from: Jinshi Data