What the Fed’s rate cuts mean for the election
Time for some Econ 101.
Good morning! It’s Thursday, September 19, 2024. Election Day is 47 days away.
I got a lot of questions in my inbox yesterday about the Federal Reserve’s interest rate announcement: what exactly was being announced, and why it matters. So I’m leading of this morning with an explainer, to hopefully lay it all out in simple, understandable terms. As always, ping me if you have any questions.
Let’s dive in!
The Federal Reserve — America’s central bank — was created in 1913, but it wasn’t until the bipartisan Federal Reserve Reform Act of 1977 that Congress codified what is known as the Fed’s “dual mandate”:
Maintaining price stability (working to keep the annual rate of inflation at around 2%)
Maintaining maximum employment (trying to keep the unemployment rate as low as possible)
Its main lever to accomplish these two (sometimes contradictory) goals is raising and lowering interest rates — specifically, the federal funds rate, which is the interest rate at which commercial banks lend their excess reserves to each other overnight. When the Fed raises or lowers the federal funds rate, other consumer-facing interest rates — such as the price of home or car loans — typically move in tandem, creating a ripple effect throughout the economy.
In general, higher interest rates mean lower inflation — since it makes borrowing more expensive, leading people to spend less, driving prices down. But, as prices go down, unemployment is often driven up — since fewer employers will hire if fewer people are spending money.
That’s why the Fed’s balancing act is such a tough one — and why previous efforts by the central bank to combat inflation by raising interest rates, most famously in the early 1980s, have led to recessions. When the Fed is able to tamp down inflation by raising interest rates, but then lower them before unemployment gets too high, it’s known as a soft landing.
The Fed’s announcement on Wednesday was a signal that they believe they’re on their way to achieving a soft landing.
Fed officials have spent the several years hiking interest rates in order to squash spiraling inflation. With the annual inflation rate at 2.5% in August (edging closer to the Fed’s target) — and the same month’s unemployment report showing that hiring is beginning to slow — the Federal Open Market Committee (which is made up of the seven Fed governors and five regional Fed bank presidents) decided Wednesday that it was time to begin bringing rates down for the first time since 2020.
“The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” the FOMC said in a statement.
In other words: inflation is getting under control; now it’s time to act before the other side of the dual mandate (unemployment) gets out of hand. “As inflation has declined and the labor market has cooled, the upside risks to inflation have diminished and the downside risks to employment have increased,” Fed chair Jerome Powell said at a press conference announcing the policy shift.
“We don’t think we’re behind,” Powell added. “We think this is timely. But I think you can take this as a sign of our commitment not to get behind.”
The Fed was somewhat aggressive in its rate cut, reducing the federal funds rate by a half-percentage point, to between 4.75 and 5%. Powell also signaled that further rates would be coming later in the year.
What does all this mean for you? Expect to see the interest rates you interact with to begin edging down as the Fed’s benchmark does — although not all the changes will happen overnight. Mortgage rates plummeted to a two-year low after the announcement, making it easier to buy a home. Auto loans will begin to fall too; eventually, so will the interest rates charged to those with credit card debt.
And how will the rate cuts impact the election? To answer that question, just look at how both parties are responding to the move.
Republican presidential nominee Donald Trump has accused the Fed of “playing politics” with the decision, arguing that it “shows the economy is very bad” — and that the central bank (led by Powell, his own appointee) is seeking to come to Democrats’ rescue.
Meanwhile, Democratic presidential candidate Kamala Harris called the announcement “welcome news for Americans who have borne the brunt of high prices”; President Joe Biden hailed it as an “important moment” in the fight against inflation. Earlier this week, some Democratic lawmakers had even urged Powell to cut interest rates even more aggressively.
In general, the move is a sign that the Fed feels optimistic about the state of the economy, which is welcome news for Democrats, considering deeply negative perceptions of the Biden economy is one of Harris’ biggest vulnerabilities going intocan November. “The U.S. economy is in good shape,” Powell said on Wednesday. “It’s growing at a solid pace, inflation is coming down, the labor market is in a strong place. We want to keep it there.”
Whether American voters agree with Powell’s assessment is a different story: consumers have felt worse about the economy than economists for months now, and the impacts from the rate cut — coming after early voting has already begun in some states — may not arrive fast enough to change their minds.
More news to know
House Speaker Mike Johnson’s plan to avert a shutdown failed to pass on Wednesday, with 14 of his own Republican members voting against it. Johnson has yet to tell lawmakers what his “Plan B” will be.
The International Brotherhood of Teamsters, one of America’s largest unions, announced that it won’t endorse a candidate for president. A blow to Kamala Harris, it will be the first time since 1996 that the union hasn’t endorsed the Democratic presidential candidate.
Harris and her running mate Tim Walz are “on pace to do fewer interviews and press conferences than any major party's presidential pairing in modern U.S. history,” Axios reports.
Trump’s denigration of Haitians is “part of a pattern that goes back years and appears to have its roots in the early 1980s,” according to The New York Times.
The day ahead
All times Eastern.
President Biden will deliver remarks at the Economic Club of Washington, D.C., addressing the interest rate cut and the state of the economy. Watch at 1:15 p.m. Later, he will deliver remarks at the Congressional Hispanic Caucus Institute’s 47th annual awards gala. Watch at 8:45 p.m.
Vice President Harris will hold a campaign event with Oprah Winfrey in Detroit. Watch at 8 p.m.
Former President Trump will participate in an event on combatting antisemitism in Washington, D.C. Watch at 6 p.m.
The Senate will hold a procedural vote to advance Rose Jenkins’ nomination to be a U.S. Tax Court Judge. Watch at 10 a.m.
The House will begin consideration of the No Bailout for Sanctuary Cities Act, which would prohibit cities that provide sanctuary to undocumented immigrants from receiving federal funds to assist those immigrants. Watch at 10 a.m.
Thank you so much for the education about this important subject. I certainly do appreciate it.
Thanks for breaking this down for us, Gabe. You've explained the Interest rate adjustment in simple language for folks like me to understand.(I had to cheat in General Math just to get a C ) LoL Thank You 💯😀💙🇺🇲🌊🌊