(Reuters) – The U.S. Federal Reserve may have just faded from the presidential campaign spotlight, with a new set of forecasts showing interest rate cuts are not likely until after Election Day.
Central bank policymakers on Wednesday kept their benchmark interest rate unchanged at 5.25% to 5.50%, where it has stood since July last year.
They also released forecasts showing greater hesitancy than before about cutting high borrowing costs, which have made it more expensive for Americans to buy anything on credit from a washing machine to a car to a house — a dynamic that has contributed to the continued poor consumer development. Democratic President Joe Biden’s view of the economy and its management.
As recently as March, Fed officials predicted that rates would fall by three-quarters of a percentage point this year, an expectation that would have led to cuts that would begin this summer and continue leading up to the Nov. 5 presidential election. That could have opened the Fed to criticism that it tipped the balance late in the rematch between Biden and Republican former President Donald Trump.
But with inflation more persistent than expected and the labor market still strong, officials have scrapped that forecast and projected only a quarter-point cut this year, an expectation that suggests no action is likely before their latest meeting . of the year in December.
JAWBONING
Investors, for their part, have not completely given up hope for an earlier start that would keep the Fed in the election spotlight. The interest rate futures markets still give a roughly six in ten chance of a rate cut in September.
A tariff cut could then improve consumer sentiment in Biden’s favor, a prospect Trump began focusing on earlier this year.
“I think (Fed Chairman Jerome Powell) is going to do something to probably help the Democrats, I think, if he cuts rates,” Trump said in a Fox Business interview earlier this year. “It seems like he’s trying to lower interest rates to maybe get people elected, I don’t know.”
A delay until after the election could now spell headwinds for Biden, who polls show is getting low marks for his handling of the economy despite near-record low unemployment, record-high household wealth and above-trend growth.
“This is clearly bad news for Joe Biden’s campaign, which is desperately trying to convince voters that the economy is in good shape thanks to so-called Bidenomics,” said Republican consultant Jeanette Hoffman.
Asked about the shift, White House press secretary Karine Jean-Pierre said the administration had no comment. “We have always been very clear about the Fed. They are independent. We do not comment on… the Fed.”
The Trump campaign did not immediately respond to a request for comment.
ELECTIONS AND THE FED
Interest rate cuts during elections are not unheard of, but relatively unusual.
The most recent occurred in 2020, when the Powell Fed, with Trump as president, cut rates to near zero in response to the sudden outbreak of the COVID-19 pandemic. Trump still lost the election to Biden in November.
The next most recent event was when the Fed under Ben Bernanke repeatedly cut rates in the fall of 2008, as the financial crisis broke out and Democrat Barack Obama and Republican John McCain battled for the White House. Obama won.
In 1992, Alan Greenspan’s Fed cut interest rates several times in the months before Election Day because of rising unemployment. Republican George HW Bush lamented what he saw as a too little-too-late response from the Fed and partly blamed it for his loss to Democrat Bill Clinton.
“I think if interest rates had been lowered more dramatically, I would have been re-elected president, because the… [economic] The recovery we were in would have been more visible,” Bush said in an interview with David Frost in 1998. “I reappointed him and he disappointed me.”
HOW A CIRCUMSTANCE CAN STILL HAPPEN
To be fair, conditions could change enough over the next few months to warrant a cut by the Fed at its meeting in mid-September, seven weeks before the election, but not necessarily in a way that would benefit Biden can come.
At his press conference on Wednesday, Powell presented two ‘tests’ for initiating interest rate cuts: the Fed is either gaining more confidence that inflation is moving sustainably towards the central bank’s 2% target, or there is an ‘unexpected deterioration’. of labor market conditions.
If the first test is the trigger, that could bode well for Biden. If it is the second, this could be to Trump’s advantage.
“If we were to see a troubling weakening more than expected in the labor market,” Powell said, that could lead to rate cuts sooner than currently forecast. “We fully understand the risks, and that is not our plan. We wait for things to break and then try to fix them.”
(Reporting by Dan Burns; additional reporting by Ann Saphir and Nathan Layne; Editing by Andrea Ricci)
