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Writer's pictureThe Bulldog Inquirer

The Politics of the Fed’s Rate Cut

Current Events

Calvin Collins-Knapp

Figure 1: Kamala Harris and Donald Trump (NBC News 2024)


This is a continuation of last week’s piece on the Federal Reserve. We would advise reading

that first to familiarize yourself with much of the vocabulary used here.

 

As the Federal Reserve slashed interest rates in September, the implications for the general

election in November have been a subject for debate among political analysts. Some

believe the impacts of inflation during President Biden’s administration have already done

enough damage to permanently scar many sections of the electorate. Other analysts look

to new polling data showing Trump’s general advantage in the economy dwindling,

evidence that the economy’s excellent recovery and growth post-COVID has not been lost

on Americans.


The Fed’s rate cut mere weeks before the election has sparked controversy, despite the history of rate changes in election years. Since 1972 there has been a shift in rates during election years to some degree1 in all but two cycles: 2012 and 2016. In the five times rates were increased in this time, the incumbent party has won four times; in the six times rates have fallen in an election year, the challenging party has won five times. It is important to note, however, that all but two of these rate changes have been continuations of cycles that were already in motion; only four times before 2024 had there been a shift to lowering rates during election years. Furthermore, new cycles of rate cuts have, in the past, favored challengers to the White house. However, this has not stopped Trump from accusing the Fed of trying to influence the election in Harris’s favor, also taking the opportunity to claim that the ‘economy would be very bad; or they’re just playing politics.’ While the economy is a chief issue for voters, the Fed is a completely independent of the executive branch; Jerome Powell is actually a Trump appointee, assuming the role in 20182. Furthermore, therate cuts will probably take a few months to have an effect on the economy, so other than people’s perception of government action, (which should not be understated), the cuts may not have as large a role as some claim they will. So, while the claim the rate cuts were politically motivated hold relatively little water, it very well may serve as a way to engage Trump’s base come election day.


The reaction of the two campaigns has been quite disparate. The Harris campaign has reacted positively, as inflation has largely caused a negative perception of the economy, despite strong economic growth in other areas. On the other hand, the Trump campaign has lashed out at the Fed, as already mentioned, for being too partisan. Furthermore, while Trump has already mentioned his dissatisfaction with the central bank and could be pushed further towards bringing the Fed under more direct presidential control3, aproblematic policy that could politicize monetary policy, something that has historically been largely apolitical. The question now is whether this will alter the election in any meaningful way. During the Biden Administration the recovery from the pandemic and overall economic growth have far exceeded projected growth. In fact, recent growth has raised concerns over leaving other rich countries combined4. Despite this, many Americans maintain a pessimistic view of the economy because of inflation, with only 25% of Americans saying they are satisfied with how things are going. The Harris campaign certainly hopes that this move by the federal reserve will be seen by many as an official end to inflation, easing their concerns over the economy. The Trump campaign, by contrast, will hope to frame this as yet another example of the establishment trying to undermine him and his campaign, a key force that will mobilize his base to vote. It remains unclear which of these two views will play out in reality, and what, if any, the impact will be.


Either way, it remains to be seen whether this move by the Feds will prove decisive or fade in to the background of an election cycle already saturated by viral coverage and unprecedented controversy.


 

Bibliography

1) What Has the Fed Done in Election Years? Rate Changes Happen More Often than Not | Reuters, Reuters, 28 Sept. 2024, www.reuters.com/markets/rates-bonds/what-has-fed-done-election-years-rate-changes-happen-more-often-than-not-2024-09-18/.


2) Higham, Aliss. “Federal Reserve Rate Cut Sparks Maga Fury: ‘Election Interference.’” Newsweek, Newsweek, 19 Sept. 2024, www.newsweek.com/federal-reserve-rate-cut-maga-fury-election-interference-1956106.


3) Zurcher, Anthony. “How Campaigns Will Seize on Fed Interest Rate Cut in US Election.” BBC News, BBC, 18 Sept. 2024, www.bbc.com/news/articles/cpv2zvzvp90o.


4) Rabinovitch, Simon, and Henry Curr. “The American Economy Has Left Other Rich Countries in the Dust.” The Economist, The Economist Newspaper, 14 Oct. 2024, www.economist.com/special-report/2024/10/14/the-american-economy-has-left-other-rich-countries-in-the-dust.


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