Mortgage rates and inflation could focus attention on the Fed in this election

This year is shaping up to be a big year for Federal Reserve officials: They expect to cut interest rates several times as inflation steadily declines, giving them a chance to put an end to to a two-year effort to cool the economy.

But 2024 is also an election year — and the Fed’s expected shift in stance could put it in the political spotlight just as election season gets underway.

By changing the cost of borrowing, the Fed’s decisions help strengthen the strength of the American economy. The central bank is independent of the White House, meaning the administration has no control or input into Fed policy. This construct exists specifically so that the Fed can use its powerful tools to ensure long-term economic stability, without worrying about whether its policies help or harm candidates for office. Fed officials fiercely defend this autonomy and insist that politics do not factor into their decisions.

That doesn’t stop politicians from talking about the Fed. recent comments from leading candidates suggest that central banking will likely be a hot topic heading into November.

Former President Donald J. Trump, the front-runner for the Republican nomination, spent his term convincing the Fed to lower interest rates and in recent months has argued that in interviews and to rallies that mortgage rates – which are closely tied to Fed policy – ​​are too high. It’s a topic of discussion that could prove useful when housing affordability is a challenge for many American families.

Yet Mr. Trump’s history suggests that he might also take the opposite course if the Fed starts cutting rates: he passed the 2016 elections castigating the Fed for keeping interest rates low, which he said gave incumbent Democrats an advantage.

President Biden has avoided talking about the Fed out of respect for the institution’s independence, which is what he has been referring to. But he suggested he would prefer that rates not continue to rise: He recently called Positive but moderate employment reported a “sweet spot” that was “necessary for stable growth and lower inflation, without encouraging the Fed to raise interest rates.”

The White House provided no official comment.

Such remarks reflect a reality that political polls make clear: Higher prices and high mortgage rates are weighing on economic sentiment and making voters gloomy, even though inflation is now slowing and the job market has remained surprisingly strong. While these Fed-related issues resonate with Americans, the central bank will likely remain in the spotlight.

“The economy is definitely going to play a big role,” said Mark Spindel, chief investment officer at Potomac River Capital and co-author of a book on Fed policy.

Fed policymakers raised interest rates from near zero to a range of 5.25% to 5.5%, the highest in 22 years, between early 2022 and summer 2023. These changes were aimed to slow economic growth, which would help contain rapid inflation.

But today, price pressures are easing and Fed officials may soon begin debating the timing and magnitude of rate cuts. Policymakers predicted last month that they could cut borrowing costs three times this year, to about 4.6 percentand investors believe that rates could fall even further, about 3.9 percent by the end of the year.

The authorities also reduced their large bond balance sheet. since 2022 – a process that can cause long-term interest rates to rise marginally, undermining markets and economic growth. But officials have signaled in recent minutes that they may soon discuss when to walk away from that process.

Already, the mortgage costs Mr. Trump was referring to have begun to decline as investors anticipate lower rates: 30-year rates peaked at 7.8% in late October and are now just above 6.5 percent.

Even if the Fed can explain its current change by economic factors (inflation has fallen quickly and the Fed wants to avoid overdoing it and causing a recession), it could force central bankers to adjust their policy at a critical political moment.

Former and current Fed officials insist the election won’t really matter. Policymakers try to ignore politics when making interest rate decisions, and the Fed has changed rates in other recent election years, including at the start of the pandemic in 2020.

“I don’t think politics enters much into the debate at the Fed,” said James Bullard, who was president of the Federal Reserve Bank of St. Louis until last year. “The Fed reacts the same way in election years and non-election years.”

But some on Wall Street believe cutting interest rates just before an election could put the central bank in a difficult situation – especially if the measures come closer to November.

“It will be increasingly uncomfortable,” said Laura Rosner-Warburton, senior economist and founding partner of MacroPolicy Perspectives, an economic research firm. Cutting rates as soon as possible could help with that, several analysts said.

And Mr. Spindel predicted that Mr. Trump would likely continue talking about the Fed on the campaign trail, potentially amplifying any unease.

Since the early 1990s, presidential administrations have generally avoided talking about Fed policy. But Mr. Trump upended that tradition both as a candidate and later while in office, regularly haranguing Jerome H. Powell, the Fed chairman, on social media and in interviews. He called Fed officials “idiots” and Mr. Powell an “enemy.”

Mr. Trump had nominated Mr. Powell to replace Janet L. Yellen as Fed chair, but it did not take long for him to sour following his election. Mr. Biden reappointed Mr. Powell for a second term. Mr. Trump has already said he would not drive back Mr. Powell as Fed Chairman if re-elected.

Of course, this wouldn’t be the first time the Fed has adjusted policy in a politically tense environment. Some economists worried that the rate cuts in 2019, as the Trump administration pushed for them, appeared to be giving way. Central banks still lowered rates that year.

“We never take political considerations into account,” Mr Powell said said at the time. “We also do not pursue monetary policy to guarantee our independence.”

Economists say the way to lower rates in an election year is through clear communication: By explaining what they are doing and why, central bankers may be able to allay concerns that any decision to ‘To act or not to act is politically motivated.

“The main thing is to keep it readable and legitimate,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. “Why do they do what they do?”