Impact of Fed’s Interest Rate Cut on 2024 Election

The Federal Reserve’s recent decision to cut interest rates for the first time since 2020 has sparked significant debate as the 2024 election approaches. On Wednesday, the Fed announced a 50 basis point reduction in the federal funds rate, lowering it from 5.25% to 5%, a move likely to draw mixed reactions from political figures, including former President Donald Trump and Vice President Kamala Harris. This rate cut is seen as one of the most consequential moves made by the Fed in recent years and may play a pivotal role in shaping the political landscape leading up to the election.

Interest rates are often a hot-button issue in the political arena, especially during election years. Lower rates are generally viewed favorably by voters because they make borrowing cheaper, resulting in lower mortgage payments and reduced interest on student and small business loans. As such, politicians tend to focus on interest rates as part of their broader economic policies, even though the Federal Reserve operates independently from the rest of the government. Historically, the Fed’s decision-making has aimed to maintain this independence, guided by a dual mandate: to control inflation and maximize employment. Yet, political leaders from both parties have frequently voiced their opinions on how the Fed should handle interest rates.

This summer, former President Donald Trump speculated that the Fed might make a politically motivated decision if it lowered rates before the November election. Speaking to Bloomberg, Trump argued that the Fed should refrain from such actions, stating it was “something that they know they shouldn’t be doing.” However, economic data seems to support the need for a rate cut, with inflation easing and unemployment rates rising. Trump’s comments suggest that he views this decision through a political lens, although he promised in July that there would be “a lot of cutting” of interest rates if he were to return to office. Despite his reservations about the Fed’s current move, Trump has long advocated for lower rates to stimulate economic growth.

On the other hand, Vice President Kamala Harris and her allies have expressed more favorable views toward the Fed’s rate cut. Although Harris herself has not made a direct statement on the matter, several prominent Democrats have called for rate reductions. In March, President Joe Biden hinted that he believed rates would “come down,” while Senators John Hickenlooper, Elizabeth Warren, and Sheldon Whitehouse penned a letter to Fed Chairman Jerome Powell earlier this week urging a 0.75 percentage point reduction in rates. While the Fed’s decision ultimately fell short of that request, the move was still seen as a step in the right direction by many within the Biden administration.

The timing of this interest rate cut could potentially benefit Harris as she seeks to solidify her position within the current administration. Economic analysts suggest that the Fed’s decision might provide a boost to her campaign by presenting the administration as taking action to address economic concerns. Mark Zandi, an economist at Moody’s Analytics, told The Washington Post that the rate cut would serve as “an economic tailwind behind the Harris campaign for sure.” In a press release following the Fed’s announcement, Harris described the decision as “welcome news for Americans” but refrained from commenting on the future of U.S. monetary policy. President Biden, in a post on X, also praised the move, calling it an “important moment” for the economy.

While Trump has yet to publicly respond to the rate cut, he and Harris have clashed over the role of the Fed in the past. In August, Trump raised eyebrows when he suggested that the president should have more influence over the Fed’s decisions, citing his business acumen and claiming to have “better instinct than…people that would be on the Federal Reserve or the chairman.” Trump later clarified his remarks, stating that while he believed the president should have input, Fed officials were under no obligation to heed his advice. Nevertheless, his comments underscore the ongoing debate over the independence of the Fed and the degree to which it should be influenced by the executive branch.

The Federal Reserve, often referred to as the U.S. central bank, is responsible for managing monetary policy, regulating commercial banks, and controlling the nation’s money supply. Its most important function is determining the federal funds rate, the interest charged for reserve transactions between financial institutions. This rate, set by the Federal Open Market Committee (FOMC), influences borrowing costs for consumers and businesses alike, from corporate bonds to car loans. The Fed’s goal is to strike a balance between keeping inflation in check and promoting job growth, raising rates when inflation is high and lowering them when the economy is at risk of a downturn.

While the Fed is designed to operate independently from political influence, the president does have some power over its leadership. The president appoints the Fed’s seven board of governors, who hold permanent seats on the FOMC. President Biden has appointed four governors, including Powell, whom Trump appointed as Fed Chair in 2018. While the president cannot directly control monetary policy, the individuals appointed to the Fed can influence its direction, making these nominations politically significant.

The recent rate cut comes at a time when the economic outlook is uncertain, and market analysts were divided over what the Fed’s next move would be. Derivative trades tracked by the CME Group suggested a 60% chance of a 50 basis-point cut, with a 35% chance of a smaller 25 basis-point reduction. The 0.75 percentage point cut called for by Warren and other Democrats was deemed unlikely by most analysts, but the Fed’s decision to implement a 50 basis point cut signals that it is responding to growing concerns about economic stagnation.

Not all Republicans share Trump’s opposition to the rate cut. Some members of the party have expressed support for the Fed’s decision, arguing that it is a necessary step to address the current economic conditions. For instance, Rep. Dan Meuser (R-Pa.) told Politico that “the time is right” for a rate cut, while Sen. John Kennedy (R-La.) said, “it is time” for the Fed to take action. Sen. Thom Tillis (R-N.C.) added that focusing on data, rather than timing, is “the way the Fed should operate.”

In the midst of this debate, Project 2025—a controversial political plan backed by Trump’s allies—has added another layer of complexity to the issue. The roadmap calls for a significantly reduced role for the Federal Reserve, with some proposals even suggesting the abolition of the central bank in favor of a more hands-off approach to monetary policy. Trump has denied any involvement in the project, but its existence highlights the ongoing discussions within Republican circles about the future of the Fed and its place in the U.S. economy.