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Fed officials say interest rate decisions are based solely on how the economy develops and whether inflation continues its downward trend. Federal Reserve Chairman Jerome H. Powell is likely to restate his position during two days of Congressional testimony starting this week before the House Financial Services Committee starting Wednesday.
“We don’t consider politics in our decisions. We never do. And we never do,” Powell said on CBS News’ “60 Minutes” last month. “And, fortunately, I think the historical record supports that. People went back and looked. For me, this is the fourth Fed presidential election, but that doesn’t enter into our thinking at all. ”
At Wednesday’s hearing, Powell is expected to tell lawmakers that his next action has not yet been decided.
“If the economy performs broadly as expected, it would be appropriate to begin tapering policy restraints at some point this year,” Powell is expected to say in prepared remarks. Inflation target percentage is not guaranteed. ”
But with rate cuts not expected to begin until this summer, campaign developments could take a different view. For example, the Biden administration is touting strong growth, a booming job market, and easing inflation. But the president’s polling on the economy, particularly inflation, is weak, and his campaign will likely benefit from lower interest rates to ease the soaring costs of mortgages, auto insurance and business investments. (White House officials have tried not to comment on Fed policy, adhering to a long-standing practice that President Donald Trump has often abandoned.)
On the other hand, President Trump Republican candidates again this year used higher-than-normal inflation to attack Biden’s record. President Trump also complained about high mortgage costs at rallies and quickly resumed his old strategy of blaming the Fed since he took office. In an interview with Fox Business Network’s Maria Bartiromo last month, President Trump said: [Powell is] Maybe they’re trying to lower interest rates to get people elected, I don’t know. ” President Trump added, “I think if we lower interest rates, we’ll probably do something to help the Democrats.”
If politics is generally uncomfortable territory for Mr. Powell and his colleagues, this year will put them in a particularly harsh spotlight. (Mr. Powell was first nominated to the Fed board by President Barack Obama, then named Fed chairman by Mr. Trump, and then nominated for a second term by Mr. Biden.)
Krishna Guha, vice chairman of Evercore ISI and a former New York Federal Reserve official, said, “The Fed is not just trying to be nonpartisan, but to appear nonpartisan in what is likely to be a pretty tough election season.” I will try very hard.” . “First and foremost, the way they’re going to do that is by sticking to their knitting and trying to do the job mandated by Congress very rigorously.”
The Federal Reserve strictly protects its independence from politics. That’s because policymakers will make decisions that will shape the economy for years to come. Their goal is to stabilize prices and help the labor market grow as much as possible. Much of the rest will be left to Congress and the White House.
Analysts point to the Fed’s decades-long track record. Last week, a JPMorgan report revealed that regardless of economic conditions, the central bank “continued to pursue its dual mandate regardless of the election.”
Wells Fargo says: “We do not believe that elections play a major role in determining monetary policy. It suggests that it is a powerful force.”
However, central banks do not operate in a vacuum either. To get an accurate read on the economy, the Fed tracks what’s happening in Washington and pays close attention to potential crises, such as a government shutdown or the debt ceiling deadline. This reflects immigration trends and key policies such as President Trump’s tax cuts and Biden’s sweeping economic stimulus package. Mr. Powell also consistently interacts with members of Congress and maintains strong relationships with Republicans and Democrats on Capitol Hill. He also has regular breakfasts and talks with Treasury Secretary Janet L. Yellen, herself a former Fed chair.
Many Fed officials have said they are in no hurry to start cutting rates, especially after January’s higher-than-expected inflation report. Interest rates are currently at their highest levels in decades, as the Fed has done its best to curb inflation over the past few years. Central bankers are now implementing policies that give the economy a little more breathing room, as long as they are confident that inflation has fallen to normal levels.
“I’m not in a hurry to make any decisions,” Richmond Fed President Tom Barkin told CNBC on Friday. “Let’s go to the meeting and see what we can find out.”
But even as inflation continues to trend lower and the economy appears poised for rate cuts, the message could be mixed.
The Fed’s calendar has a quirk. Officials have so far signaled three rate cuts this year, and Powell has indicated that they won’t start cutting rates until mid-year. For this reason, analysts are paying increasing attention to the Fed’s June meeting. Fed officials then meet in late July, mid-September, the first week of November, and mid-December.
In other words, the Fed could cut interest rates at a certain pace before Election Day.
At the same time, the Fed does not like to commit to specific interest rate changes too far in advance. The economy has changed direction multiple times, so officials want to keep their options open. The Fed’s own forecasts for rate cuts are also non-binding and will be evaluated over the entire year rather than at individual meetings.
As a result, it would be highly unconventional for officials to dictate a series of decisions long before November. But it could also leave open the possibility for outside critics and observers to link cuts later in the year to the political calendar.
Tim Dewey, chief U.S. economist at SGH Macro Advisors and a longtime Fed watcher, said the Fed will need a stronger case for rate cuts as the months go by. Unless the economy starts to stagnate, that is, if the job market weakens or growth plummets, it will be difficult for the Fed to justify waiting until the end of the year to cut rates simply because an election is near. There is a possibility that it will happen.
“As we get closer to the election, I think the idea of just controlling inflation looks increasingly bad,” Duy said. “Because the question is, ‘Why cut rates?'” If growth remains strong, what is the need for rate cuts? ”
Evercore ISI’s Guha said the Fed could help itself by establishing a kind of “default glide path.” At some point, officials could use economic indicators to gently set expectations for cuts in successive rounds or at every other meeting, without calling their decisions final.
“In an ideal world, we would settle for a regular pace of reduction,” Guha said. “There is regularity in your decisions and you do not appear to be taking sides ahead of the election.”
For now, the Fed has made its focus clear. It’s about getting the job done no matter what.
“Integrity is priceless,” Powell said on “60 Minutes.” “And in the end, that’s all you have. …We’re going to keep what’s ours.”
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