Could Fed interest rate cuts tip the election?

The central bank could make interest rate cuts during a campaign focused on the economy

federal reserve building with american flag background
The Fed is "damned if they do, and damned if they don't"
(Image credit: Getty Images)

Federal Reserve leaders held off on making what is expected to be the first of several expected 2024 interest rate cuts last week and signaled they might wait months before getting started. Recent data has shown that inflation — a focus in this year's presidential election campaign — is cooling. But the economy has been growing faster than expected despite higher borrowing costs, so there's still a danger prices could surge again, reported USA Today.

Some economists had predicted the Fed would start cutting its benchmark interest rate, currently set between 5.25% and 5.5%, in March now that inflation is nearing the central bank's 2% target. Its preferred inflation measure is at 2.6%. But Fed Chair Jerome Powell said he didn't think "the committee will reach a level of confidence by the time of the March meeting" to start lowering rates. 

The impact of interest rate cuts on the economy could be huge, boosting stocks and consumer spending heading into a presidential election "pivoting in no small part on voters' perceptions of President Joe Biden's economic stewardship," according to The Associated Press. The Fed's statement suggests the first rate cut could be several months away, so it could fall at a key point in the 2024 presidential campaign. Former President Donald Trump, the presumptive Republican nominee, said Powell was "political" and would "do something to probably help the Democrats," like lowering rates. Could the central bank's decision on when to cut rates tip the November vote?

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Inevitable interest rate cuts will boost Biden

Fed officials don't "set interest rates with presidential elections in mind," wrote Jim Tankersley in The New York Times. "But the growing likelihood that the Fed might begin to cut rates this year could provide an election-year assist to President Biden." It looks like the Fed might raise rates several times before Election Day, which could lower mortgage rates and boost the housing market. Whatever happens this year, the Fed apparently "already, and unintentionally, helped Mr. Biden's re-election prospects by holding rates steady for the back half of 2023 as inflation cooled," because more rate hikes could have triggered a recession.

If the Fed is as politicized as "cynics" think, a "surprise March cut could still be in the cards," Albert Edwards, a strategist at French investment bank Société Générale, said in a note, as reported by Fortune. "Trump's lead is even greater now than it was in mid-December," so if Fed policymakers do "covertly favor" Biden's reelection they have more incentive than ever to "start easing in March and press their foot hard onto the gas pedal." Even if they don't have a preferred candidate, Fed officials certainly don't want to be blamed for tanking the economy in the middle of a "contentious" campaign.

Waiting until after Election Day might be best

The Fed is "damned if they do, and damned if they don't," Santander chief economist Stephen Stanley told Bloomberg. Cutting rates early could help Biden; waiting could help Trump. But Fed leaders don't "want to make newspaper headlines in the heat of the election season." Cutting rates now might not look political, but doing it deeper into the campaign could look bad. Fortunately for the Fed, waiting makes sense, because inflation isn't tamed yet. It's cooling because "noisy" things like travel and used car prices are falling, but we're not in the clear. Look for two interest-rate cuts this year — after Election Day.

With inflation down sharply and "within striking distance" of the Fed's target, there's "no rationale" for keeping rates near 5.5%, said Heather Long in The Washington Post. That would amount to "slamming the brakes on the economy." Sparking a recession "would almost certainly mean President Biden won't get reelected." The way to show neutrality is to start cutting rates in March and get them below 5% by the end of summer, then hold them steady while the general election campaign gets going in earnest. That "would lessen the Fed's influence on the election."

Deciding when to cut rates is never easy, said Nick Timiraos in The Wall Street Journal. But it's "doubly difficult" in "the glare of election-year politics," Trump supporters already accuse the central bank of helping "Biden by signaling that cuts are coming." Democrats are "nervous" the Fed will wait too long. Federal Reserve policymakers know they're in the spotlight, but "former Fed officials hotly dispute the suggestion that politics would weigh on when or how fast the central bank lowers interest rates this year." Whatever the Fed decides, Powell probably won't be able to "convince the most committed partisans" the decision wasn't motivated by politics. The trick will be explaining to everyone else the Fed is doing what's best for the economy, not a single candidate.

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