Nick Timiraos, a famous reporter of the Wall Street Journal who is known as the "Fed's mouthpiece," wrote again after the Fed's latest decision, saying that the Fed has opened the door to a rate cut in September, which will clash with the U.S. presidential election which will be in full swing by then.
For a central bank that wisely wants to stay out of the fray of partisan politics, facing potential policy shifts around the election is a lose-lose proposition. Cutting rates before the election could anger Republicans and former President Donald Trump, but holding off on necessary cuts could damage the economy and upset Democrats.
The awkward situation has left Fed officials in the coming weeks to set expectations and explain the rationale behind a series of rate cuts they are likely to initiate at the central bank’s next meeting in mid-September.
Federal Reserve Chairman Jerome Powell said on Wednesday that his focus is on ensuring the Fed can lower inflation while preventing past rate hikes from tipping the economy into recession, and he will continue his long-term efforts to lay that foundation. "Our focus is squarely on that," Powell said.
He vigorously rejected accusations that the Fed would be influenced by politics. "We never use our tools to support or oppose a particular party, politician, or any political outcome," Powell said. "Everything we do before, during or after an election will be based on the data, the outlook, and the balance of risks, and nothing else."
Two years ago, the Fed raised interest rates from near zero and quickly launched the fastest rate hike cycle since the early 1980s to fight inflation. Fed officials last raised the benchmark short-term rate to around 5.3% in July 2023, bringing the rate to a two-decade high. During the period of rate increases, inflation has fallen significantly, from 7.1% two years ago to 2.5% in June, according to the Fed's preferred measure. The Fed's long-term goal is for inflation to reach 2%.
Because the Fed’s actions can change economic outcomes, they also have important political consequences indirectly. Economic models show that because bond investors have already priced in at least two and possibly three rate cuts this year, the timing of the specific meetings where they take place should have little direct impact on the labor market, economic growth and inflation.
But until the Fed cuts rates, consumers with credit card debt and businesses that rely on short-term debt will not benefit. In addition, such a policy shift has important symbolic significance and may boost consumer sentiment. In addition, the market currently generally expects the Fed to cut interest rates in September. If the Fed does not follow suit, borrowing costs may rise and other financial conditions may also tighten.
Republicans step up pressure
In June, Trump told Bloomberg Businessweek that the Fed’s current interest rate settings were “very tough” for the economy, but lowering rates before the election was something officials “know they shouldn’t do.”
Trump’s allies have signaled they will pressure Powell politically if he follows through with a rate cut in September, fearing a rate cut would boost sentiment and give Democrats a victory lap on the economy.
“If they wait until after the November election to cut rates, the impact will be minimal,” said Michael Faulkender, a former Treasury economist during the Trump administration.
The Fed's next meeting is on Sept. 17-18, with the subsequent meeting beginning on Nov. 5, the day after the election.
Falkind, now chief economist at the pro-Trump think tank America First Policy Institute, said he thought it would be political to launch a campaign to cut rates before the election.
Some Republicans said that even though Trump has been critical of the Fed’s September rate cut, any bellicosity would fade if he is elected because he would want a strong economy.
“There’s a good argument that if Trump wins, he’ll be quick to forgive the Fed ... in fact, he’ll be glad the Fed committed to cutting rates when he was about to take office,” said Marc Summerlin, a former economic adviser to President George W. Bush.
Good medicine tastes bitter
Three years ago, many Democrats trying to pass ambitious government spending plans on Capitol Hill predicted that the high housing prices that initially posed a mortal threat to the legislative agenda would fade on their own.
Now, some worry that Vice President Harris’ campaign won’t benefit from the recent slowdown in inflation because the Fed’s interest rate prescription is as unpalatable as the price pressures it’s trying to control. Higher rates make it more expensive to buy big-ticket items like cars and homes, which are often purchased with debt.
“It does put some programs out of reach that might have been affordable given the wage growth that American workers have seen as the economy has recovered,” said Kitty Richards, who will oversee stimulus spending at the Treasury Department from 2021 to 2022.
Former Biden administration officials and some former Federal Reserve officials have argued in recent weeks that the Fed should cut interest rates now to prevent any unnecessary weakness in the economy and maximize the chances of an elusive soft landing.
Bharat Ramamurti, a former White House economic aide, said: "Fiscal policy and monetary policy have together created an extraordinarily strong recovery. The finish line is in sight, and it would be tragic if the Fed stumbled with 0.1 miles left in the marathon..."
Three Democratic senators, including Massachusetts Senator Elizabeth Warren, said in a letter on Wednesday that interest rates are too high and that not lowering them would be tantamount to "capitulating to political threats" from Republicans.
Policy changes are not uncommon near elections
Fed officials say taking the election calendar into account would violate their apolitical approach. “We believe Congress has mandated that we conduct our business in an apolitical manner at all times, not just at some times,” Powell said Wednesday.
Eric Rosengren, who served as Boston Fed president from 2007 to 2021, said the Fed has a strong case to cut interest rates soon because inflation is retreating slightly faster than officials expected at their June meeting while unemployment is creeping higher.
“The apolitical approach is that if you think policy is going to be too tight going into the end of the year, you should ease policy,” he said. “Avoiding what you think is appropriate policy is a political act.”
History shows that it is not uncommon for the Fed to change policy around elections:
The Fed cut rates by 50 basis points in July 1992 and another 25 basis points in September of that year as the economy struggled to recover from a recession. The July rate cut came days after President George W. Bush, who was seeking reelection, called for lower rates. (Bush lost, and years later he blamed then-Fed Chairman Alan Greenspan for keeping rates too high.)
In May 2000, the Fed raised interest rates to a nine-year high and kept them there until January 2001, when it began rapidly lowering them.
The Fed began raising interest rates in June 2004 and has done so at every subsequent policy meeting, as George W. Bush faced a close re-election battle.
The Fed lowered interest rates throughout 2008, triggering a severe financial crisis in the weeks before the election as a slowdown in the housing market took hold.
In September 2012, as Obama was seeking re-election, U.S. officials launched a controversial novel bond-buying stimulus program.
In September 2020, the Federal Reserve made a bold commitment to keep interest rates low as the economy emerged from the impact of the pandemic amid concerns that the Fed might run out of ammunition.
“In my experience, the Fed’s approach has been to keep their heads down, think about what the right policy is, and when they need to make adjustments, do what’s necessary,” said Charles Evans, a former senior economist and later president of the Chicago Fed who served on the rate-setting meetings from 1995 to 2022.
Article forwarded from: Jinshi Data
