Fed cuts key rate of interest by half a percentage point – what this implies for the economy and the presidential election

What does the Fed’s rate of interest cut say in regards to the state of the economy?

The The Federal Reserve has two mandates: to maintain inflation on the goal of around 2% and to maintain unemployment low. And the central bank balances this dual mandate when it considers raising, lowering or leaving rates of interest unchanged.

For a while now, policymakers have been focused on getting inflation under control through a series of rate of interest hikes. The Fed's benchmark rate of interest was raised from 0 to 0.25 percent in early 2022 to five.25 to five.5 percent in September 2024.

I feel what motivated them to chop the rate of interest by half a percentage point now – as an alternative of the quarter point that some expected – is the labor market. The labor market is just not exactly shaky – Unemployment is currently at 4.2% – but it surely isn’t any longer as robust because it was.

The latest employment figures were barely below expectations. And some economists say that A recession is imminentIn fact, there are some who say that the United States is already in a recession.

So I believe that nearly all of the Fed's rate-setting panel was more convinced by the recent unemployment figures than by inflation. As for its dual mandate, the Fed obviously believes it has the fight against inflation under control and has subsequently turned to its second concern, namely reducing unemployment.

So is that this the soft landing the Fed hoped for?

I’d say yes. We at the moment are in a soft landing – and I expect the US economy to decelerate but not enter a recession.

If I'm right, it is a success of Fed policy. A soft landing may be very unusual – I can only consider one case where this has happened because the end of World War II. That was mid-1995And it is alleged that the then Fed Chairman Alan Greenspan during his every day bath in the bathtub against back painbecame concerned in regards to the prospect of significantly higher prices. He then persuaded the Fed board to boost rates of interest, which it did – a move that averted a possible recession.

What impact will the rate of interest cut have?

First of all, this doesn’t mean we are going to return to 2019 prices – that might require wage cuts and deflation. It will just slow inflation, or the speed at which prices rise.

But it is going to have an effect. In the primary hour after the choice, the stock markets were jumped on the news – so investors were obviously satisfied – although The major indices ended the day lower.

Investment markets are likely to anticipate any expected change, so we have now already seen some reduction in mortgage rates of interest – which were trending downward within the run-up to the Fed decision. Credit card rates of interest also trended downward.

So the markets were clearly expecting a rate cut from the Fed. But we are going to likely see further declines in mortgage rates because the Fed has indicated further rate of interest cuts are imminent.

Is there a risk that some observers will see this as a political move?

I'm sure many individuals will interpret this as Fed Chairman Jay Powell helping the Democrats by cutting rates of interest before the election.

But it’s an economically motivated decision. There isn’t any evidence that it has anything to do with the election.

What does history tell us about rate of interest cuts and elections?

I feel most serious observers know that the Fed is independent and makes its decisions based solely on what’s best for the economy. In fact, over the past 50 years, you’ll discover only a time when eyebrows were raised. That was in the course of the Nixon administration.

Under Fed Chairman Arthur Burns, the central bank was accused of pumping money into the system and lowering rates of interest with a view to make a positive impression before the 1972 elections. But later all of it got here crashing down when the US entered a phase of double-digit inflation rates.

Apart from that, one will hardly find any evidence of interference. In fact, presidential candidates from each parties have complained in regards to the Fed.

Could the rate of interest cut still play a job within the election campaign?

As for Americans' attitudes toward the economy? Not really. I don't think mortgage rates will fall much further. And while the news is encouraging for borrowers, there’s one other side to rate cuts: They are negative for some kinds of investorsMoney market investors, for instance, is not going to view the Fed's move so positively.

That doesn't mean, nevertheless, that the 2 presidential candidates won't try to make use of the news to their advantage.

Democrats prefer to take credit for lowering inflation under their leadership, declaring that it will help Americans borrow money to purchase their very own homes – ignoring the indisputable fact that they themselves play no role in deciding rates of interest.

Republicans might well now say, “Hey, the Fed cut rates because the economy was doing worse than we thought. And a half-percentage point cut means they're desperate, the economy is terrible, and we're headed for a recession because of the Biden administration's policies.”