Daily Management Review

New Projections Suggest The US Fed Is Abandoning The Election Cycle


New Projections Suggest The US Fed Is Abandoning The Election Cycle
It appears that the U.S. Federal Reserve has removed itself from the limelight of the presidential campaign, as new projections indicate that interest rate reduction are unlikely to occur until after Election Day.
The benchmark interest rate was left at 5.25%–5.50% on Wednesday by central bank governors, where it has remained since July of last year.
Additionally, they released forecasts that indicated a stronger reluctance than previously to begin lowering the high borrowing costs that have increased the cost for Americans to purchase anything on credit, from a car to a house. This dynamic has led to consumers' consistently negative perceptions of the economy and Democratic President Joe Biden's handling of it.
As late as March, Federal Reserve officials predicted that interest rates would drop by 0.75% this year. If accurate, the reductions would have started this summer and continued until the week of the November 5 presidential election. That may have led to accusations against the Federal Reserve that it was tipping the odds in favour of Biden in the last moments of the rematch with Republican former President Donald Trump.
Officials have already replaced that prediction with one that calls for just one quarter-point decrease this year, suggesting that no action is likely before their final meeting of the year in December. This is due to stickier-than-expected inflation and a relatively robust labour market.
For their part, investors are still holding onto the expectation that the Fed would make an early start and remain prominent during the election. The interest rate futures markets continue to predict a six-in-10 probability of a rate reduction in September.
Then, a rate cut may lift consumer spirits, which would help Biden—a target that Trump had started attacking earlier this year.
Earlier this year, Trump stated in an interview with Fox Business that he believed Fed Chair Jerome Powell would decrease interest rates in order to support the Democrats. "It appears that he is attempting to cut interest rates, possibly in an effort to help people win elections, I'm not sure."
Biden, who surveys indicate receives bad evaluations for his management of the economy despite nearly record low unemployment, record-high household wealth, and above-trend growth, may now face difficulties if he waits until after the election.
Republican consultant Jeanette Hoffman stated, "This is obviously bad news for Joe Biden's campaign, who have been desperately trying to convince voters that the economy is in good shape thanks to so-called Bidenomics."
When asked about the change, Karine Jean-Pierre, the press secretary for the White House, stated the government was silent. "On the Fed, we have always been quite clear. They function on their own. We don't discuss the Fed here.
“After four years of crippling inflation that’s hurting families everywhere from the grocery store to the gas pump, Americans trust President Trump to fix our economy and put more money back in their pockets, as he did in his first term," Trump Campaign National Press Secretary Karoline Leavitt said.
Rate reductions in election years are not unprecedented, but they are uncommon.
The most recent was in 2020, when the Powell Fed reduced rates to almost zero while Trump was president in reaction to the unexpected start of the COVID-19 epidemic. Even still, that November, Biden defeated Trump in the election.
The next most recent event occurred when, in the midst of the financial crisis and with Republican John McCain and Democrat Barack Obama fighting for the presidency, the Federal Reserve under Ben Bernanke reduced interest rates several times in the autumn of 2008. Obama prevailed.
In response to growing unemployment in the months leading up to Election Day in 1992, Alan Greenspan's Fed lowered interest rates many times.
Republican George H. W. Bush lamented the Federal Reserve's perceived inaction and held it partially responsible for his defeat to Democrat Bill Clinton.
"I think that if the interest rates had been lowered more dramatically that I would have been re-elected president because the [economic] recovery that we were in would have been more visible," Bush stated in an interview with David Frost in 1998. "I reappointed him, and he disappointed me."
Undoubtedly, events in the upcoming weeks may shift enough to justify a reduction by the Federal Reserve during its meeting in mid-September, seven weeks prior to the election, but maybe not in a way that would help Biden.
Powell outlined two "tests" for beginning rate decreases at his news conference on Wednesday: Either the Fed gains more assurance that inflation is steadily approaching the 2% target set by the central bank, or there is a "unexpected deterioration" in labour market conditions.
Biden may have good news if the first test turns out to be the trigger. Should the second occur, it may work in Trump's favour.
Powell stated that rate reduction may occur sooner than currently anticipated "if we saw troubling weakening more than expected" in the labour market. "We completely understand the risks, and that's not our plan.to wait for things to break and then try to fix them."