By Jeff Stein, The Washington Post (c) 2024
The Federal Reserve’s long-awaited cut to interest rates may prove a boon to Vice President Kamala Harris’s campaign as the presidential election enters the home stretch.
On Wednesday, the central bank is widely expected to reduce the benchmark rate for the first time since 2020, lowering borrowing costs for businesses and consumers alike. The move reflects optimism that the battle with inflation is over, and the lower rates should boost growth, which could in turn brighten the gloomy national mood about the economy.
The magnitude of the cut, however, could shape its political ramifications. A cut of a half-point might fuel optimism among investors and spark a rally in the stock market, which has already been at or near all-time highs. But a smaller Fed cut of a quarter point could disappoint and lead to a sell-off in markets, where traders have been betting on a larger move recently. Some analysts maintain that the bigger cut could counterintuitively prove worse for the stock market, by suggesting the central bank perceives the economy is in worse shape than commonly believed.
“The rate cut, which will be the start of a series of rate cuts, is an economic tailwind behind the Harris campaign for sure,” said Mark Zandi, chief economist at Moody’s Analytics. “It’s not just about the symbolism – it’s also about the real effects. It’s really going to support the economy.”
The Federal Reserve has kept its interest rate target between 5.25 and 5.5 percent for more than a year – the highest level since the early 2000s. Central bank officials say these high rates have been necessary to tame the fastest inflation in four decades. While they have been careful not to comment on the Federal Reserve, stressing the independence of the central bank, Biden administration officials have mostly seen higher rates as a helpful way to combat inflation, which had soured many voters on the economy.
But the political cost of the economy’s cure may rival that of the disease. As borrowing costs rose, Americans faced higher mortgage rates, increased credit card debt and more expensive car loans, squeezing household budgets. Businesses, too, have felt the pinch, with higher interest rates making it more costly to take out loans for expansion and hire new employees. The labor market has showed signs of cooling amid this pressure, with the unemployment rate rising from 3.7 percent last year to 4.2 percent now.
Former treasury secretary Larry Summers was part of a team of economists who argued that Americans may feel particularly bad about the economy in part because of the impact of higher rates, which they said are not captured in traditional inflation measures. Higher interest rates have also discouraged millions of Americans from buying homes, pushing up costs in the rental market. Beyond inflation generally, more Americans list the cost of owning or renting a home as their family’s most important financial problem, according to a Gallup poll this May.
It’s unclear how quickly a Fed rate cut could affect the economy. But former president Donald Trump has already used the expected move to criticize the central bank. The GOP presidential nominee has long baselessly accused the Federal Reserve of conspiring against him to improve Democrats’ political standing, even though he nominated the Fed’s chair, Jerome H. Powell. (President Joe Biden also nominated Powell for a second term.)
“It’s something that they know they shouldn’t be doing,” Trump told Bloomberg News in an interview published in May.
In February, Trump said of Powell on Fox Business: “I think he’s going to do something to probably help the Democrats, I think, if he lowers interest rates … it looks to me like he’s trying to lower interest rates for the sake of maybe getting people elected.”
Komal Sri-Kumar, president of Sri-Kumar Global Strategies, an economic consulting firm, pointed to strong retail sales data as suggesting there’s a risk that the Fed cuts causes prices to go back up.
“The consumer is very strong, and you’re giving him or her more stimulus by cutting interest rates, which tells me the risk of inflation picking up is very real,” Sri-Kumar said. “There is a risk of inflation reigniting with a 50-basis-point cut.”
Democrats, though, are optimistic lower rates will blunt Trump’s attacks on the administration’s economic record. Mortgage rates have dropped already from their highs of 8 percent last year to closer to 6 or 7 percent. Auto loans have come down, as well, and small businesses could also benefit from access to cheaper capital.
“Harris is running with a strong 2024 economy, and Trump’s characterization of the Biden economy seems to be stuck in 2021 or 2022,” said Felicia Wong, president of Roosevelt Forward, a left-leaning policy organization. “Any rate cut would reflect Harris’s analysis of today’s economy.”