Jay Powell is keen to stay out of politics, especially during an election year. The Fed chairman doesn't want anyone to think there's a horse in the race in November. Especially since one of those horses, President Donald Trump, is sure to attack him from all angles.
Powell, who was appointed Fed chair by President Trump and later reappointed by Joe Biden, has made every effort to emphasize that the central bank is above political squabbles. He has repeatedly emphasized that he and other members of the Federal Open Market Committee are focused solely on economic indicators when it comes to monetary policy decisions, which are currently determining whether to cut interest rates.
Rep. Patrick McHenry, Republican of North Carolina, who chairs the House Financial Services Committee, said during a hearing Wednesday that some predict the Fed will cut interest rates multiple times this year, while others predict it won't do anything. He pointed out that there are people. Differences between pro-reduction and non-reduction advocates have become the biggest economic debate of the year.
“What do you say?” McHenry asked Powell. The Fed chairman's response was: “The reality is that it depends on the economy.”
Beyond academic debate, whether the Fed cuts interest rates will have important political implications this year. The economy and its perceptions will be a key factor in determining how voters behave when they head to the polls in the fall. The economy is something Mr. Powell has a big hand in shaping. So he is right at the center of the storm.
“Implicitly, explicitly, passively or actively, the Fed makes decisions that can have a significant impact on the economy and economic outcomes,” said Skanda Amarnath, executive director of the advocacy group Employ America. “I am doing so,” he said. “The Fed is important to the state of the economy, and the state of the economy is not unrelated to election results.”
The US economy is in pretty good shape at the moment. The labor market is strong and growth is strong. Inflation has been falling, but has not yet reached the Fed's 2% target. A soft landing (meaning things return to normal without a recession) is on the horizon. Still, consumer sentiment, while improved compared to, say, six months ago, isn't all that great. Although inflation has subsided, prices are still higher than before. The same goes for interest rates that the Fed has raised to combat inflation. Voters are dissatisfied with rising prices and feel that high interest rates are also weighing on them. A recent research report by former Treasury Secretary Larry Summers and a group of economists found that high borrowing costs are a major factor weighing on people's mood.
“Unlike modern economists, consumers consider the cost of money to be part of the cost of living,” the authors write.
It tracks. Interest rates may seem abstract, but they can have a huge impact on how people view their financial situation. If you're looking for a home now, mortgage interest rates are surprisingly high compared to a few years ago. Maybe you've been waiting for car prices to settle down, only to realize you can't afford a loan. Or maybe you own a small business and sudden borrowing costs keep you up at night.
The Fed influences the state of the economy, and the state of the economy is not unrelated to election results.
The White House can't go back and reverse the sudden rise in inflation, but the Fed delayed raising rates too long to have any leverage. But lowering interest rates could make people feel more secure about their economic situation, giving Democrats and Mr. Biden a boost. The Fed expects to start cutting rates at some point this year, but the timing is an open question. march? May? June? later? The answer to that question could have a significant impact on November's results.
“Interest rates are a big reason why people are dissatisfied, regardless of inflation and despite the fact that other economic outcomes can lead to dissatisfaction,” Amarnath said.
I'm not saying anything new here—Trump says it too. He knows that lower interest rates stimulate the economy, lift people's spirits and ultimately help the party in power. He publicly worried ahead of the 2016 election that the Fed would cut interest rates to help Hillary Clinton's presidential bid, and repeatedly criticized Powell and the Fed for raising interest rates while in the White House. This is why.
The Fed is an independent institution designed to be outside politics, so it is not subject to short-term pressures to control the economy. There have been times in the past when presidents have tried to shake up policy, often with disastrous results. Before his reelection, Richard Nixon pressured the Fed to keep interest rates low, which helped cement the disastrous inflation of the 1970s. Ronald Reagan made his wishes known to the central bank during his presidency, and had his chief of staff instruct then-Fed Chairman Paul Volcker not to raise interest rates in the run-up to re-election. In any case, Volcker wasn't planning on raising interest rates. But in recent decades, until President Trump, most presidents have avoided saying much. Many observers are taking Mr. Powell at his word that the Fed will not consider politics in its interest rate decisions, even in an election year. But that doesn't mean he exists in a bubble either.
“Powell is concerned about whether Trump or Biden will cut or raise interest rates,” said Elizabeth Pancotti, director of special initiatives at Roosevelt Forward, a sister organization of the progressive think tank Roosevelt Institute. I don't think I'm thinking about it,” he said. She added: “That could influence what kind of message he sends about rate hikes or rate cuts.”
Even in a non-election year, Fed officials are very careful with their words. Political perspectives may make this even more so.
Sarah Binder said, “I take Chairman Powell's word for it.'' Although Chairman Powell does not formulate policy with a clear evaluation of the superiority or inferiority of one political party or presidential candidate in mind, the Fed certainly “We have to manage political risks.” George Washington University political scientist said. The full transcript of FOMC meetings, kept secret for five years, shows that the Fed is not immune to political winds. For example, records from 2018 show that officials discussed the need for political support for their decisions and were well aware of external pressures.
“The Fed really doesn't want to shake things up. They don't want to upset Congress. They need allies in Congress. They don't want Congress to reinstate the Federal Reserve Act,” Binder said. . “The Fed can't escape the political winds here.”
Of course, not everything about the economy is under the Fed's control. That means Mr. Powell can only be blamed, politically or otherwise. If bird flu returns and chickens start getting sick en masse, egg prices will rise again. Central banks can't do much about oil and gas prices, which are subject to global market forces and geopolitical turmoil. Moreover, most Americans don't think about the Fed at all, even though it's a factor in their economic lives.
Mr. Powell is currently walking a tightrope in many ways. The economic risks from the Fed's decisions are real. Cutting rates too soon could cause inflation to start accelerating again, and cutting rates too long could have a big impact on the economy, pushing the country into recession. . It's a bit of a Goldilocks situation, but finding just the right one involves much more than quality sleep.
“They have to do the best job they can. Their internal condition is to do this as close to the book as possible as an institution,” said Diane Swonk, chief economist at KPMG US. Ta. “The Fed has no horse in this race, and never will, but it will always be blamed.”
emily stewart As a senior correspondent for Business Insider, he writes about business and economics.
