"New Fed News": Whether to cut interest rates or not, the Federal Reserve is inevitably drawn into the U.S. presidential election

The Federal Reserve's July meeting remains unchanged, with Chairman Powell repeatedly adopting a dovish stance, and the door to a rate cut in September is opening.

However, despite Powell's repeated statements that the Fed remains politically neutral, renowned journalist Nick Timiraos, known as the "New Fed News Agency," wrote on Thursday that regardless of his stance, the conflict brought by the U.S. presidential election could still put the Fed in a dilemma; after all, cutting rates before the election may anger Republicans and former President Trump, but failing to make necessary rate cuts could harm the economy and displease Democrats.

At a press conference on Wednesday, Powell stated that the Fed's focus is solely on ensuring the ability to lower inflation while preventing past rate hikes from pushing the economy into a recession, strongly denying accusations of political influence on the Fed.

Powell said:

"We have never used our policy tools to support or oppose any party, politician, or political outcome. Anything we do before, during, or after the election will be based on data, outlook, and risk balance, not anything else."

Timiraos' article stated that to combat inflation, the Fed began raising rates rapidly from near zero two years ago, marking the fastest rate hike pace since the early 1980s. Officials raised their benchmark short-term rate to around 5.3% in July 2023, the highest level in 20 years.

The rise in rates coincided with a significant drop in inflation, with the inflation rate falling from 7.1% two years ago to 2.5% in June, with the Fed's target being to keep inflation under control at 2% for a period of time.

He mentioned that since the Fed's actions can alter economic outcomes, they can also indirectly have significant political consequences. Economic models suggest that as bond investors have already anticipated at least two or even three rate cuts this year, the exact impact of a Fed rate cut on labor markets, growth, and inflation should not be significant.

However, consumers with credit card debt and businesses relying on short-term debt will not benefit from a Fed rate cut before it happens. Additionally, this policy change is symbolically important and could boost consumer confidence. Moreover, with the market now widely expecting a rate cut in September, failure to deliver could lead to rising borrowing costs and tighter financial conditions.

Increased Pressure from Republicans Against Pre-Election Rate Cut

In an interview with the media in June, Trump stated that the Fed's current rate setting is "very harsh" on the economy, but cutting rates before the election is something Fed officials "know they shouldn't do."

Trump's allies have indicated that if Powell proceeds with a rate cut in September, they will increase political pressure on him. Republicans are concerned that a rate cut could boost sentiment and provide Democrats with a favorable economic argument.

Former Treasury Department economist under the Trump administration, Michael Faulkender, stated that initiating rate cuts before the election would damage the Fed's credibility: "And if they wait until after the November election to take action, the impact will be minimal." However, some Republicans have also expressed that even though Trump criticized the Fed after the rate cut in September, if he is elected, this hostility should dissipate because he wants a strong economy.

Mark Sumerli, who served as an economic advisor during the elder Bush administration, said:

"There is a good reason to believe that if Trump wins the election, he will quickly forgive the Fed... In fact, he will be pleased that they promised to cut rates when he took office."

Democrats: Delaying rate cuts is succumbing to threats

According to Timiraos, three years ago, a series of government spending plans were passed by the Democratic-controlled Congress, at that time they believed that high inflation would fade on its own.

But now, some are concerned that Vice President Kamala Harris's presidential campaign will not benefit from the recent inflation slowdown, as the Fed's rate policy and price pressures they are trying to control are equally unpopular. Higher rates make purchasing big-ticket items such as cars and homes more expensive, as these items are usually bought on credit.

Former Biden administration officials and some former Fed officials have argued in recent weeks that the Fed should cut rates now to prevent unnecessary softness in the economy and maximize the chances of a soft landing.

Former White House economic aide Bharat Ramamurti said, "Fiscal and monetary policy have jointly created an exceptionally strong recovery. The finish line is in sight, and it would be tragic if the Fed tripped when the marathon still has 0.1 miles to go."

Three Democratic senators, including Elizabeth Warren of Massachusetts, wrote in a letter urging Powell to cut rates on Wednesday that keeping rates high would mean "succumbing to Republican political threats."

Fed insists policy adjustments are not related to elections

Fed officials say that taking the election schedule into account would undermine their depoliticized stance. Powell said on Wednesday, "We believe that Congress mandates us to conduct business in a depoliticized manner at all times, not just at certain times."

Eric Rosengren, president of the Federal Reserve Bank of Boston from 2007 to 2021, said that due to inflation falling faster than officials expected at the June meeting and the gradual rise in unemployment, the Fed has good reason to cut rates soon.

He said:

"The depoliticized approach is, if you think policy will be too tight by the end of the year, you should ease. Avoiding taking the policy you think is appropriate is a political act."

In fact, history shows that it is not uncommon for the Fed to make policy adjustments before and after elections; the Fed made rate adjustments in 1992, 2000, and 2004.

Charles Evans, who served as a senior economist from 1995 to 2022 and later as president of the Federal Reserve Bank of Chicago, said, "In all my experience, the Fed's approach to this issue is to think carefully about the right policy and take necessary actions when adjustments are needed."