Federal Reserve Set to Cut Interest Rates, May Boost Economy Ahead of Election

WASHINGTON ― The Federal Reserve is set to cut interest rates on Wednesday, revitalizing the economy in the crucial months ahead of the Nov. 5 presidential election.

Whether the Fed will cut rates is not in doubt. But the majority of the rate cut, the first since March 2020, has been raised, amid widespread doubts about the strength of the labor market and the Fed’s own willingness to slow the economy. A sharp cut could anger former President Donald Trump, who has repeatedly threatened the Fed’s independence.

“They usually try to avoid making changes too close to an election, but sometimes the most dangerous thing is nothing,” said Erica Groshen, a senior economic adviser at Cornell University and former vice president in the Federal research and statistics group. Reserve Bank of New York.

“The fact that they’re willing to move suggests that they’re seeing clear signs that they don’t want to ignore,” Groshen told HuffPost, “and the biggest risk is not doing those changes, but from political actors who would want to attack the baseless.”

However, progressives argue that the risk of a recession is too great to let Trump’s threats stand in the way. Sen. Elizabeth Warren (D-Mass.), a frequent critic of Federal Reserve Board Chair Jerome Powell, said the Fed should cut rates aggressively.

“The Fed makes it more likely that the US will end up in bankruptcy every day if it slows down, or if it makes a small rate. [cut] that shows they’re trying to maintain an economy that doesn’t need that kind of restriction,” Warren told HuffPost. “It’s just that clear.”

The central bank raised rates at a rapid pace starting in 2022, in a bid to stop the rapid rise in consumer prices. With rates rising at pre-pandemic rates, a rate cut of any size would amount to something of a “mission accomplished” for the Fed.

Many economists expected the rate hike to trigger a deep recession, but unemployment remains at historic lows, as the economy appears to have reached a so-called recession. simple as Powell and his colleagues thought.

Unemployment rose modestly to 4.2% while the consumer price index, the main measure of inflation, showed prices rose just 2.5% in July compared to a year earlier. – the lowest increase since January 2021, and close to the 2% level that is considered acceptable. for maintaining low unemployment and price stability.

“They have done a good job so far. We are getting closer“It’s getting to the easiest level we’ve ever had with monetary policy to reduce inflation in the past,” Groshen said.

But Lindsay Owens, executive director of the progressive think tank Groundwork Collaborative, said it’s too close to pandering to party watchers and “declaring total victory.”

“Maybe it’s fair to say that the fight against inflation has been lost, but I think we have to wait a while to make sure we’re clear on the labor market,” he said.

With voters still unhappy with the nation’s economic performance, the White House is eager to tout its success in the closing weeks of the campaign season.

National Economic Adviser Lael Brainard, who previously served on the Fed’s board of governors, defended the administration against criticism that its response to the onset of the COVID-19 pandemic was too expensive and that it created the inflation that the Fed worked to bring down earlier. control. He argued that the spike was caused by several factors.

“The fact that inflation has fallen while employment has grown provides good evidence that inflation is linked to several shocks related to the pandemic and the Russian invasion of Ukraine that ended when time is running out,” Brainard said in a prepared statement to the Council on Foreign Relations. Relationships this week.

Higher interest rates combat inflation by making it more expensive to borrow money, which causes businesses and households to borrow less and spend less. That results in businesses reducing price increases as a way to retain their customers. Low interest rates can encourage business investment, make new loans cheaper and increase employment.

Trump suggested in an interview with Bloomberg last month that the Fed should not cut rates before the election, although he has said little about it since then.

“They’ll probably do it before the election, before Nov. 5, even though it’s something they know they shouldn’t do,” Trump said.

As president, Trump repeatedly called on Powell to cut tariffs. Since leaving the White House, he has urged presidents to have more control over the central bank.

There is little doubt that the rate will decrease. Powell made a show about August’s speech that inflation has slowed enough to warrant a change in monetary policy.

“My hope has grown that inflation is on a steady path back to 2%,” Powell said, explaining that reducing supply deficits, along with the Fed’s efforts to reduce demand, is the key. is the main driving force behind this development.

He said: “The time has come for the policy to change.

The big question on Wednesday is how much Fed governors will cut their key rate. Most market analysts expect a quarter-percent decrease, while progressives are calling for more. Bond traders as of Tuesday afternoon were betting on the rate at half a point.

Warren has strongly criticized Powell for raising rates more strongly than he believes is necessary and waiting too long for a rate cut. In Monday’s letter, he urged Powell to cut rates by three percent.

“Jobs numbers are adjusting slowly, so the Fed should reduce the pace to avoid sliding into a potential crisis,” Warren said in the letter, and Sens. Sheldon Whitehouse (DR.I.) and John Hickenlooper (D-Colo.).

But starting with a big rate of half a point or more could pose its own risks, according to Neil Shearing, chief economist at London-based research firm Capital Economics.

“If the authorities chose to cut the money even more, it could be interpreted as a sign that the Fed knows something about the economy that the market does not know. The reaction in the markets can be unpredictable,” Shearing said. write a research letter for clients.

Groundwork’s Owens said the data show fiscal policy is too tight now and has been tight for some time, to justify the big cuts. Another reason rates are still so high, he said, may be politics — and fears among Fed officials that the cuts will be seen as an effort to help Harris survive the recession.

“You have to wonder why we’re behind the eight ball like we are,” Owen said, estimating the “neutral” for the Fed’s key interest rate would be 2.5 % as opposed to more than 5% currently.

He said: “I don’t really know what is going on here.