by This year will be a big one for Federal Reserve officials: They expect to cut interest rates several times as inflation steadily declines, giving them a chance to wind down a two-year effort to cool the economy.
But 2024 is also an election year, and the Federal Reserve’s expected change of stance could put it in the political spotlight just as the campaign season begins.
By changing the cost of borrowing money, the Federal Reserve’s decisions help boost the strength of the U.S. economy. The central bank is independent of the White House, meaning the administration has no control or input into Federal Reserve policy. That construct exists specifically so that the Federal Reserve can use its powerful tools to ensure long-term economic stability regardless of whether its policies help or hurt those running for public office. Federal Reserve officials fiercely protect that autonomy and insist that politics not influence their decisions.
That doesn’t stop politicians from talking about the Federal Reserve. In fact, recent comments from leading candidates suggest the central bank will likely be a hot topic heading into November.
Former President Donald J. Trump, the front-runner for the Republican nomination, spent his term as president urging the Federal Reserve to lower interest rates and, in recent months, has argued in interviews and in rallies that mortgage rates, which are closely tied to Federal Reserve policy, are too high. It’s a conversation starter that can work well when housing affordability is a challenge for many American families.
Still, Trump’s history suggests he could also take the opposite tack if the Federal Reserve starts lowering rates: passed the 2016 elections criticizing the Federal Reserve for keeping interest rates low, which he claimed was giving an advantage to the Democrats in power.
President Biden has avoided talking about the Federal Reserve out of deference to the institution’s independence, something he has referenced. But he has hinted that he prefers rates not to continue rising: recently called Positive but moderate employment reports a “sweet spot” that was “necessary for stable growth and lower inflation, without encouraging the Federal Reserve to raise interest rates.”
The White House had no official comment.
Such comments reflect a reality that political polls make clear: Higher prices and high mortgage rates are weighing on economic sentiment and saddening voters, even though inflation is now slowing and the job market has held steady. surprisingly strong. As those Fed-related issues resonate with Americans, the central bank is likely to remain in the spotlight.
“The economy is definitely going to matter,” said Mark Spindel, chief investment officer at Potomac River Capital and co-author of a book on Federal Reserve policy.
Fed policymakers raised interest rates from near zero to a range of 5.25 percent to 5.5 percent, the highest in 22 years, between early 2022 and the summer of 2023. Those changes were intended to slow down economic growth, which would help curb rapid inflation.
But now price pressures are easing and Federal Reserve officials could soon begin debating when and how much they can cut rates. Authorities projected last month that they could reduce borrowing costs three times this year, to about 4.6 percentand investors believe rates could fall further, to about 3.9 percent by the end of the year.
Officials have also been reducing their large balance of bond holdings. from 2022 – a process that can push up long-term interest rates at the margin, taking some vitality out of markets and economic growth. But officials have signaled in recent minutes that they could soon discuss when to abandon that process.
The mortgage costs that Trump has referred to have already begun to decline as investors anticipate lower rates: 30-year rates peaked at 7.8 percent in late October, and are now just above 6.5 percent.
While the Fed can explain its current shift based on the economy (inflation has fallen rapidly and the Fed wants to avoid overdoing it and causing a recession), it could leave central bankers adjusting policy at a critical political juncture.
Former and current Fed officials insist the election won’t really matter. Policymakers try to ignore politics when making interest rate decisions, and the Federal Reserve has changed rates in other recent election years, including at the start of the pandemic in 2020.
“I don’t think politics comes into the debate much at the Federal Reserve,” said James Bullard, who was president of the Federal Reserve Bank of St. Louis until last year. “The Federal Reserve reacts the same way in election years as it does in non-election years.”
But some on Wall Street think that cutting interest rates just before an election could put the central bank in an optically difficult situation, especially if the measures came closer to November.
“It’s going to be increasingly uncomfortable,” said Laura Rosner-Warburton, senior economist and founding partner of MacroPolicy Perspectives, an economic research firm. Cutting rates sooner rather than later could help with that optics, several analysts said.
And Spindel predicted that Trump was likely to continue talking about the Federal Reserve during the election campaign, which could amplify any unrest.
Since the early 1990s, presidential administrations have generally avoided talking about Federal Reserve policy. But Trump changed that tradition as a candidate and then when he was in office, regularly haranguing Jerome H. Powell, chairman of the Federal Reserve, on social media and in interviews. He called Federal Reserve officials “fools” and Powell an “enemy.”
Trump had nominated Powell to replace Janet L. Yellen as chair of the Federal Reserve, but it wasn’t long before he became bitter about her choice. Biden reappointed Powell for a second term. Mr. Trump has already said he would not name again Powell as chairman of the Federal Reserve if he were re-elected.
Of course, this would not be the first time that the Federal Reserve has adjusted its policy in a politically tense context. Some economists worried that rate cuts in 2019, when the Trump administration was pushing them, looked like they were giving way. Central bankers lowered rates that year anyway.
“We never take political considerations into account,” Powell said. he said at that time. “Nor do we carry out monetary policy to demonstrate our independence.”
Economists said the trick to lowering rates in an election year would be clear communication: By explaining what they are doing and why, central bankers might be able to allay concerns that any decision to act or not act would be motivated. policy.
“The key is to keep it readable and legitimate,” said Matthew Luzzetti, Deutsche Bank’s chief U.S. economist. “Why do they do what they do?”
