The Federal Reserve is scheduled to meet two more times between now and the November election. The big question is whether the Fed will cut interest rates and how that will affect the presidential runoff race.
It's been a year since the Federal Reserve changed its interest rate target in any way. In July 2023, the Fed raised interest rates from 5.25% to 5.50%. The current level is considered the culmination of the central bank's historic tightening cycle, which began as a response to the worst inflation in generations amid the COVID-19 pandemic.
Federal Reserve Chairman Jerome Powell speaks at a Senate hearing on monetary policy in Washington, D.C., on July 9. (Graham Jennings/Washington Examiner)
But now, 28 months after interest rates began rising, the Fed is considering cutting them. Any change in interest rates will undoubtedly be viewed politically in one of the most contentious election years in modern history. President Joe Biden faces a stiff challenge from former President Donald Trump, who made low public approval ratings for his management of the economy one of the defining issues of his campaign.
Lower interest rates are good for consumers. Higher interest rates, on top of inflation, make things like buying a car or a home more expensive. They also make it harder to pay off credit card debt, so a lower Fed interest rate target would be good news for consumers.
“Higher interest rates make things like mortgages and loans more expensive,” Peter Logue, dean of the George Washington University School of Media and Public Policy, told the Washington Examiner. “And voters like you and me, right now, don't like that.”
Investors say the most likely scenario right now is that the Fed will cut rates just once before the November election. The Federal Open Market Committee, which controls interest rates, is scheduled to meet in July and September, but most expect the Fed to keep rates on hold this week before cutting them in September.
As of July 17, investors were pricing in about a 95% chance that the Fed would cut interest rates in September, according to CME Group's FedWatch tool, which calculates the probability using futures contract prices for the Fed's target short-term market interest rate. There is about a 1 in 20 chance that the Fed will cut rates twice before the election.
But voters probably won't feel much of a reaction from just one rate cut. If the Fed does eventually decide to cut rates, it will probably only cut them by 0.25 percentage points — a blow to consumers.
“Rates took the elevator up when they went up, but they take the stairs down when they go down,” Greg McBride, chief financial analyst at Bankrate, told the Washington Examiner. “So a single rate cut, whether it's a quarter of a percentage point or a half of a percentage point, still pales in comparison to how much rates could rise in 2022 and 2023.”
McBride said the measure would provide little immediate relief to borrowers, and he also noted that years of inflation have weighed heavily on voters' budgets.
“The cumulative price increases that households have felt over the past few years are not going to be reversed,” McBride said. “So even if interest rates fall, pressures on household finances will continue until incomes have fully caught up and household purchasing power is restored to what it was a few years ago.”
The timing of the rate cut will also be key in the election: If the Fed decides to cut rates sooner at its July meeting, voters will have more time to process the fact that interest rates are falling, according to Rosi.
“It seems more likely that the Fed will cut rates in September, which wouldn't be such a good thing for the president because by then more people will have decided who they're going to vote for,” Logue said.
Logue said either way, it's important to tell voters a story.
“Biden wants to tell the story that the economy is improving, the border is more secure, markets are rising, wages are going up and inflation is falling, and the Fed rate cut helps tell that story,” Logue said. “The sooner we tell that story, and the more facts we have behind that story, the better for President Biden.”
Federal Reserve Chairman Jerome Powell has noted that consumer price inflation is gradually returning to normal after peaking at about 9% during Biden's term, but he has been careful not to sound confident about what action the Fed will take on interest rates.
Annual CPI inflation, the most common measure of price growth, fell to 3% as of June, well below its peak but still a full percentage point above the Fed's long-term target of 2%.
To read more from the Washington Examiner, click here
Powell also suggested it could be well into the next president's term before inflation returns to 2%.
“I don't expect inflation to get back to 2 percent this year or next year — maybe later next year, but maybe the year after that,” Powell said at a recent event in Portugal. “The important thing is, we're making real progress.”