Interest Rates and the Election
The Federal Reserve is in a tough spot. It expects to cut interest rates soon. But doing so before an election will yank the apolitical central bank directly into a partisan fight.
Fed officials have lifted borrowing costs to 5.3 percent, the highest level in decades, to slow inflation. Now that price increases are fading, Fed officials think that they can dial back that response starting later this year. Investors expect the first move to come in June or July — just as the election kicks into high gear.
Donald Trump, the presumptive Republican nominee, says rate cuts this year would probably be an effort to help Democrats. Lower rates can lift markets and help the economy, so politicians tend to prefer cheap money when they are in office.
Fed officials insist that rate changes would respond to economic conditions, not politics. Still, they can’t ignore the vitriol. If they ramp up during the campaign, Trump’s attacks could convince his supporters that the Fed is bending to partisan whims. And in the long run, a loss of popular support could expose the central bank, which answers to Congress, to lawmaker censure or even political tinkering.
Prized independence
The central bank sets policy without having to check its decisions through Congress or the White House.
That doesn’t mean that Fed officials are free to do whatever they want. Congress has given the Fed its goals — full employment and low, stable inflation — and it holds regular oversight hearings. The White House influences the central bank by nominating the Fed’s chair, vice chair, and other Washington-based governors.