The Fed Could Cut Interest Rates Before The Election, Risking Political Fallout

Policymakers at the Federal Reserve try to avoid politics at all costs—but the central bank is widely expected to cut interest rates ahead of the November presidential election, a move that risks causing backlash.

The trajectory of the economy has set the Fed on a collision course with the general election, and possibly with former president Donald Trump, the Republican candidate in the 2024 race. Investors and economists expect the Fed to cut its benchmark interest rate by September.

But in an interview with Bloomberg Businessweek last week, Trump said a Fed rate cut ahead of the election was “something that they know they shouldn’t be doing.”

Why The Election Could Be Troublesome For The Fed

The dilemma for the Fed’s Open Market Committee (FOMC) , which makes decisions on interest rates, is that it’s supposed to be independent. Fed officials say the central bank does its job more effectively because it stays out of the political fray.

Interest rate cuts during election season, however, could call that independence into question.

“If the Fed aggressively cuts its key interest rate, interest rates like mortgage rates, credit card rates and other borrowing rates will likely follow,” Mike Walden, an emeritus economics professor at North Carolina State University wrote in a blog post earlier this year. “More people will be able to buy homes, vehicles and other items, lifting consumer confidence and happiness. And, if people are more confident and happier, they may be more likely to reward incumbent politicians by voting for them.”

And helping one party—in this case, the Democrats—could provoke the opposition in this election season. Some members of the Trump campaign have reportedly floated proposals to give the president a say in the Fed’s decisions on monetary policy.

“The FOMC has an undeniable (if never acknowledged) incentive to avoid initiating cuts in the last two months of a presidential election campaign,” Jan Hatzius, chief economist at Goldman Sachs, wrote in a commentary.

Elections Haven’t Stopped Past Rate Cuts

Expectations have risen that the Fed will soon cut its benchmark rate from its current 23-year high because economic activity has slowed and inflation is on the path down toward the central bank’s 2% annual target.

Fed officials recently have acknowledged the progress in taming inflation, while also saying that a delay in cutting rates could cause unemployment to rise. The Fed has a dual mandate to keep prices stable and maintain maximum employment.

Despite all the reasons to avoid election-season rate cuts, the Fed has made them in the past, Meera Pandit, global market strategist at J.P. Morgan Chase, noted in a recent commentary.

The last time the Fed cut rates within two months of an election was in 2008 when the Fed chopped rates to near zero during the Great Recession . Before that, the Fed cut rates in 1992 as the economy slowed. Neither of those rate cuts helped the incumbent party to stay in power, as in both years the White House changed hands from Republicans to Democrats.

“Whether the Fed was adjusting based on dynamic economic conditions, responding to severe recessions, or following a path already forged, it continued to pursue its dual mandate irrespective of elections,” Pandit wrote.