The Federal Reserve’s potential interest-rate cut in September is causing a stir as it coincides with the upcoming presidential election.
What Happened: The Federal Reserve’s potential move towards an interest-rate cut in September has stirred up political controversy. The central bank, which aims to remain impartial in political matters, is facing a challenging situation. A rate cut before the election could provoke Republicans and former President Donald Trump, while not implementing a necessary reduction could negatively impact the economy and upset Democrats, The Wall Street Journal reported on Thursday.
Chair of the Federal Reserve, Jerome Powell, has been laying the groundwork for such a decision, stating that his focus is on ensuring the Fed can reduce inflation without causing a recession. He has earlier denied any political influence on the Fed’s decisions.
“We never use our tools to support or oppose a political party, a politician or any political outcome,” Powell previously asserted.
The Federal Reserve had previously increased rates from near zero two years ago to combat inflation. The last increase in July 2023 brought the benchmark short-term interest rates to around 5.3%, a high not seen in two decades. These rate increases have coincided with significant drops in inflation.
However, the timing of the rate cuts could have significant political implications. Bond investors already expect at least two or possibly three rate cuts this year. But consumers with credit card debt and businesses that rely on short-term debt won’t see benefits until the Fed cuts rates. If the Fed fails to follow through with the expected September rate cut, borrowing costs could rise, and other financial conditions could tighten.
Republicans have expressed concern that a rate cut in September could boost sentiment and provide Democrats with a positive talking point about the economy. Michael Faulkender, an economist at the Treasury Department during the Trump administration, suggested that waiting until after the election to implement the rate cut would have minimal impact.
Democrats, on the other hand, have voiced concerns that the presidential campaign of Vice President Kamala Harris won’t benefit from the recent slowdown in inflation due to the unpopularity of the Fed’s interest-rate measures. Some have urged Powell to cut rates now to prevent unnecessary economic weakness and increase the chances of a soft landing.
Despite the political debate, the Federal Reserve maintains that its decisions are based on data, outlook, and balance of risks, not political considerations.
“Congress has, we believe, ordered us to conduct our business in a nonpolitical way at all times, not just some of the time,” Powell said.
Why It Matters: The Federal Reserve’s potential rate cut is not only a matter of economic concern but also a political one. The Fed is grappling with the potential impact of former President Donald Trump‘s policy shocks on the economy and interest rates. This situation has created a dilemma for the Fed, which must consider the potential policy changes that could follow a second Trump presidency or a shift in balance with Vice President Kamala Harris.
The Biden administration has reaffirmed its support for an autonomous Federal Reserve amid reports of Trump’s intentions to influence U.S. monetary policy. The White House Council for Economic Advisors underlined the importance of central bank independence, stating that central banks under political control perform poorly, while independent central banks are more effective in managing inflation.
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This story was generated using Benzinga Neuro and edited by Pooja Rajkumari
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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