Yesterday the US Federal Reserve cut its benchmark interest rate by 0.5% and told the market to expect further cuts in the months ahead, as it embarks on its first cycle of monetary easing since rates were hiked after the pandemic. The cut leaves the US’ federal funds rate at a range of 4.75-5%.
Jay Powell said after the announcement that “the US economy is in a good place and our decision today is designed to keep it there […] this recalibration of our policy stance will help maintain the strength of the economy and the labour market and will continue to enable further progress on inflation as we begin the process of moving towards a more neutral stance.”
But was the Fed’s decision designed to serve another purpose – namely to try and prevent Donald Trump winning the US presidential election in November?
It is certainly the case that the Fed’s decision to cut rates this close to an election – the central bank has not cut rates so close since 1992 – is politically controversial. Rate cuts can be read – at least by the voting public – as a sign that the economy is strong and inflation is under control (although it may not be that simple).
No surprise then that Kamala Harris, the Democrats’ presidential nominee, quickly jumped on the news and released a statement that said the rate cut was “welcome news for Americans who have borne the brunt of high prices.”
The timing of this announcement is, in the words of Republican House Speaker Mike Johnson, “suspect.”
“Right on the eve of an election? I don’t know. Count me as curious about it.”
Trump – who previously predicted that Powell would cut rates before the election to try and aid the Democrat campaign – suggested that the Fed is either “playing politics” or has been forced to cut rates in a bid to address underlying concerns around unemployment and the labour market. Trump said: “I guess it shows the economy is very bad to cut it by that much – assuming they’re not just playing politics. The economy would be very bad or they’re playing politics, one or the other.”
The perception among millions of Americans is certainly that the timing is “suspect.” This is problematic as central bank independence was supposed to be a way of ensuring that interest rate decisions were taken out of the hands of cynical, politically motivated politicians. It was said that technocrats controlling monetary policy free from democratic oversight is the best way to run the economy is a purely objective, non-partisan way. But can that argument hold when the Fed is making massive rate cuts fewer than fifty days from the election?
Author: Harry Clynch
