Rejoice! After 13 months of speculation and trillions of dollars in gambling in financial markets, the Federal Reserve is finally implementing a small interest rate cut.
At the Federal Reserve’s annual Jackson Hole policy meeting, central bank Chairman Jay Powell finally uttered the magic words: “It’s time to adjust policy,” Powell said. “The direction we’re heading is clear, and the timing and pace of rate cuts will depend on upcoming data.” If you need to translate this, the “direction we’re heading” means interest rates will go down, and the reference to upcoming data means the Fed will cut rates gradually unless a recession starts to look more likely, at which point the Fed will cut rates aggressively.
While markets knew this was coming, this is still a significant turning point that could help boost consumer attitudes heading into the November election and boost confidence that the high inflation of the past three years is finally over.
How we got here: When Joe Biden took office in January 2021, inflation was just 1.4% and Fed short-term interest rates were near zero. As we now know, a combination of factors, including COVID-era turmoil, massive shifts in consumer demand, trillions of dollars of fiscal stimulus, and Russia’s invasion of Ukraine in 2022, led to nasty inflation that peaked at 9% in June 2022.
The Fed’s main job is to fight inflation, which it usually does by raising interest rates. But this time, it delayed, not starting to raise rates until March 2022, when inflation was already at 8.5%. That delay forced the Fed to raise rates at the fastest pace in history, raising short-term interest rates to 5.5% after 11 hikes. That caused interest rates to soar on mortgages, car loans, and any other form of borrowing, making everything that requires financing suddenly more expensive.
While all this was happening, President Joe Biden’s approval rating has fallen from a high of 55% to the 40% range and has remained there for more than two years. Interest rates have risen while inflation is still high, a shock to consumers who have enjoyed low interest rates and low inflation for more than a decade. Since mid-2022, inflation has fallen but interest rates have not, and voters’ pessimistic view of Biden contributed to his decision in July to drop out of the 2024 presidential race.
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The last Fed rate hike was in July 2023. Since then, it has been a wait-and-see approach. The Fed wants to be sure it has conquered inflation before it reverses course and cuts rates. Investors are scouring every bit of inflation data for hints of what the Fed might do. Markets have rallied or sold off based on tidbits of information that suggest inflation is coming down faster or slower than expected, suggesting the Fed may cut rates sooner or later. Every time Fed policymakers say something, investors ignore everything else and maximize volume.
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So much for the tension. Chairman Powell made it clear that the Fed will begin lowering interest rates at its next policy meeting, which ends on September 17. The cut will be by 0.25 percentage points unless the economy worsens sharply. If the economy worsens sharply, the cut will be by 0.5 percentage points.
The next meeting after that isn’t until Nov. 6, just after Election Day, so voters likely won’t see a big rate cut by the time they vote for the next president. But they will know that interest rates are finally coming down, which might give people planning to buy a home or a car a little more optimism.
If this had happened six months earlier, Biden’s chances of reelection might have been higher before he withdrew in July, but it’s too late to help Biden, and besides, the Fed can’t lower Biden’s age, which is another big liability for Biden.
Would the Fed’s rate cuts help Vice President Kamala Harris, who is now the official Democratic presidential nominee? Possibly. Biden’s No. 2, Harris has similar issues with high food and housing costs. She is clearly trying to break with Biden by pushing for new ways to lower food and housing costs. Harris’ approval rating is 6-8 points higher than Biden’s, so it’s probably working.
Federal Reserve Chairman Jerome Powell walks outside the Jackson Hole Economic Symposium at Jackson Lake Lodge in Grand Teton National Park, near Moran, Wyoming, Friday, Aug. 23, 2024. (AP Photo by Amber Baesler) (The Associated Press)
As things stand, the election is likely to be very close, with Harris and Republican opponent Donald Trump running with slim margins. If inflation continues to fall and the job market holds up, a rate cut would not hurt Harris and could even help her slightly.
As for Biden, the end of his presidency may reveal that inflation was relatively temporary after all, returning to normal by the end of his term. History may be kinder to Biden than it is to current voters. The ultimate test may be whether they choose Kamala Harris as his successor.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on X. Follow.
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