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

This year will be a big one for Federal Reserve officials: They expect to cut rates several times as inflation steadily declines, giving them a chance to reverse a two-year effort to cool the economy .

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

By changing how much it costs to borrow money, the Fed’s decisions help increase the strength of the U.S. economy. The central bank is independent of the White House – meaning the government has no control or input into Fed policy. This arrangement exists specifically so that the Fed can use its powerful tools to secure long-term economic stability, regardless of whether its policies help or harm those who run for office. Fed officials fiercely guard that autonomy and emphasize that politics play no role in their decisions.

That doesn’t stop politicians from talking about the Fed. In fact, recent comments from leading candidates suggest that the central bank is likely to be a hot topic heading into November.

Former President Donald J. Trump, the frontrunner for the Republican nomination, spent his term as president challenging the Fed to cut rates and has argued in recent months during job interviews and with meetings that mortgage rates – which are closely tied to Fed policy – ​​are too high. It’s a talking point that could work well when housing affordability is a challenge for many American families.

Yet Trump’s history shows that he could also go the opposite way if the Fed starts cutting rates: him spent the 2016 elections criticizing the Fed for keeping interest rates low, which he said gave incumbent Democrats an advantage.

President Biden has avoided talking about the Fed in deference to the institution’s independence, something he has referenced. But he has hinted that he would prefer rates not to continue rising: He called recently Positive but moderate employment reports a sweet spot that was “necessary for stable growth and lower inflation, and did not encourage the Fed to raise rates.”

The White House has made no official comment.

Such comments reflect a reality evident in political polls: higher prices and steep mortgage rates are weighing on economic sentiment and making voters gloomy, even as inflation is now slowing and the labor market has remained surprisingly strong. As these Fed-related issues resonate with Americans, the central bank will likely remain in the spotlight.

“The economy is certainly going to matter,” said Mark Spindel, chief investment officer at Potomac River Capital and co-author of a book on Fed politics.

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

But now price pressures are easing, and Fed officials could soon start debating when and how much to cut rates. Policymakers predicted last month that they could cut borrowing costs three times this year about 4.6 percentand investors think interest rates could fall even further about 3.9 percent at the end of the year.

Officials have also trimmed their large balance of bonds since 2022 – a process that could push interest rates up to a range in the longer term, making markets and economic growth a little more vibrant. But officials have indicated in recent minutes that they could soon discuss when to abandon that process.

The mortgage costs Mr. Trump referred to have already begun to fall as investors anticipate lower interest rates: The 30-year rate peaked at 7.8 percent in late October and is now just over 6.5 percent.

While the Fed can explain its continued shift based on economic factors — inflation has fallen rapidly, and the Fed wants to avoid overdoing it and causing a recession — it could leave central bankers adjusting policy at a critical political moment .

Former and current Fed officials insist the election doesn’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 onset of the pandemic in 2020.

“I don’t think politics at the Fed are much involved in the debate,” said James Bullard, who until last year was president of the Federal Reserve Bank of St. Louis. “The Fed responds the same way in election years as it does in non-election years.”

But some on Wall Street believe that cutting rates right before the election could put the central bank in a visually difficult position — especially if the moves happen closer to November.

“It’s going to become increasingly uncomfortable,” said Laura Rosner-Warburton, a senior economist and co-founder of MacroPolicy Perspectives, an economic research firm. Cutting rates sooner or later could help with these optics, several analysts said.

And Mr. Spindel predicted that Mr. Trump would likely continue talking about the Fed during the campaign — potentially adding to the discomfort.

Since the early 1990s, presidential administrations have generally avoided talking about Fed policy. But Trump turned that tradition on its head, both as a candidate and later in power, by regularly addressing Jerome H. Powell, the Fed chairman, on social media and in interviews. He called Fed officials “sons of bitches” 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 on his choice. Mr Biden has nominated Mr Powell for a second term. Mr. Trump has already said it he would not reappoint Mr. Powell will become Fed chairman if re-elected.

Of course, this wouldn’t be the first time the Fed has adjusted policy against a politically charged backdrop. Some economists worried that rate cuts in 2019, when the Trump administration pushed for them, would give the impression of giving in. Central bankers cut interest rates that year anyway.

“We never take political considerations into account,” Mr. Powell said then said. “We also do not pursue monetary policy to prove our independence.”

Economists said the trick to cutting rates in an election year would be clear communication: By explaining what they are doing and why, central bankers may be able to allay concerns that any decision to move or not is politically motivated.

“The most important 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?”