The Federal Reserve’s first key interest rate cut in four years coincides with another crucial four-year event: the final stretch of the presidential election.
Fed Chairman Jerome Powell downplayed the central bank’s role in the race between Vice President Kamala Harris and former President Donald Trump on Wednesday, announcing a half-percentage-point cut in his benchmark rate. But that didn’t stop the candidates’ campaigns from getting involved, and it could prove to be a key factor for voters.
“This is my fourth time running for president at the Fed, and it’s always been the same. We always go to this meeting and ask what’s right for the people we serve,” Powell said. “We never discuss anything else.”
The decision to cut rates for the first time in the Biden administration indicates that the Federal Reserve Board of Governors believes the economy has overcome the wave of inflation triggered by the COVID-19 pandemic that has plagued it since mid-2021. The Fed raised its key interest rate 11 times between March 2022 and July 2023.
Inflation peaked at 9.1% in June 2022. The consumer price index, a measure of inflation, rose 2.5% over the past year, according to the latest release from the Bureau of Labor Statistics in August. The unemployment rate was 4.2% in August, down from 4.3% in July but still significantly higher than 3.5% in July 2023, when the Fed last raised rates.
“We currently view the risks to achieving our employment and inflation goals as roughly balanced, and we are mindful of the risks on both sides of our dual mandate,” Powell said.
Wednesday was the first in a series of expected rate cuts. The base rate currently stands at 4.75% to 5%.
Federal Reserve Board member Michelle Bowman dissented from the rest of the group, the first time she has done so since 2005. Bowman had called for a 25 basis point (or quarter percentage point) cut in interest rates.
Interest rate cut date
Both campaigns reacted quickly to the information from the Fed.
Speaking at a cryptocurrency-themed bar in New York, Trump said the cut should have been smaller.
“I think it shows the economy is in very bad shape that they cut it that much, assuming they’re not just playing politics,” the Republican candidate said. “The economy would be in very bad shape or they’d be playing politics, one or the other. But that was a big cut.”
Harris emphasized in a prepared statement that he is looking to the future.
“While this is good news for Americans who have borne the brunt of high prices, I am focused on the work ahead to continue to lower prices,” the Democratic candidate said. “I know prices are still too high for many middle-class and working families.”
Sarah Binder, a senior fellow for governance studies at the nonpartisan Brookings Institution and author of “The Myth of Independence: How Congress Governs the Federal Reserve,” said there is a long history of presidents putting pressure on the Federal Reserve, from John F. Kennedy to Richard Nixon and Trump as presidents and now as presidential candidates.
Binder said that to effectively fulfill its role in driving the economy, the Federal Reserve must enjoy trust and be recognized as a legitimate institution, and its political support depends on it doing a good job.
“The Fed doesn’t have the freedom to sit idly by or not do enough, which could further expose the Fed to risks from politicians that they really don’t want to be in,” she said.
Skanda Amarnath, executive director of Employ America, a research group that advocates for full employment, said the Federal Reserve should analyze the economic data.
“That’s what they should be considering, not where they are in the election cycle,” she said. “I think that’s the case, generally speaking. I don’t see anything here that’s just real politicization.”
What the Fed’s interest rate cut means for the economy
Many economists and economic advisers have argued that the Federal Reserve should cut interest rates for several months to avoid sedate damage to the job market and, in the worst-case scenario, a recession.
Now, consumers should notice lower costs of borrowing money to buy a home, car and other essentials.
Kitty Richards, senior policy adviser at Groundwork Collaborative, a progressive think tank based in Washington, said the Federal Reserve should not hold back on cutting interest rates now that inflation is slowing.
“The Fed has raised rates by 70 basis points four times in a row when inflation was rising. There is no reason they should let inertia stop them from normalizing rates now that inflation is under control,” she said.
Because shelter costs make up such a huge portion of inflation, Richards said she fears that keeping rates at current levels has caused mortgage rates to rise so much that housing has become unaffordable for many Americans. That, in turn, feeds into inflation, she said, creating a vicious cycle.
Dean Baker, senior economist at the Center for Economic and Policy Research, a progressive economic policy think tank, said the Federal Reserve’s decision was a good sign for the housing market.
“It’s good that the Fed recognized the weakness in the labor market and responded with an aggressive cut. Given that the risk of reigniting inflation is almost zero, a larger boost to the labor market is largely costless,” Baker said in a statement. “It will also help boost the housing market, where millions of people have put off selling their homes because of high mortgage rates.”
