Will the US Presidential Election Spark Fallout... Making Fed's Interest Rate Decision More Difficult

As the U.S. Federal Reserve (Fed) grapples with the timing of interest rate cuts, analysis suggests that the upcoming U.S. presidential election in November has made decision-making even more difficult. This is because economic judgments based on data could easily be interpreted politically.

According to the Wall Street Journal (WSJ) on the 31st (local time), the Fed announced after the regular FOMC meeting that it would keep the federal funds rate unchanged at 5.25?5.5%.

Jerome Powell, Chairman of the U.S. Federal Reserve
[Photo by Yonhap News]

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Fed Chair Jerome Powell, during a press conference immediately following the announcement, said he believes the likelihood of reaching a level where the timing of a rate cut before the March meeting can be confidently predicted is low, drawing a line under expectations for an early rate cut.

Depending on the timing of the rate cut, inflation could surge again or unemployment could rebound, making it difficult to pinpoint the right moment. This year, the presidential election adds another layer of complexity.

WSJ reported, "Supporters of former President Donald Trump, the leading Republican candidate, claim that the Fed is signaling an impending rate cut to help President Biden," while "some Democratic lawmakers worry that the Fed and the administration are misjudging inflation and maintaining high rates for too long, jeopardizing President Biden's reelection."

The Fed maintains that politics does not influence its decisions. When election issues were raised during a press conference in December last year, Chair Powell drew a line, saying, "The moment we start thinking about such things (politics), we cannot make such decisions (on interest rates)." In fact, it is not uncommon for the Fed to change rates during election seasons. Former President George Bush raised rates ahead of his 2004 reelection, and in 2021, when former President Barack Obama sought reelection, the Fed implemented bond-buying stimulus measures. In 2020, amid the COVID-19 pandemic, the Fed cut rates and resumed bond purchases.

However, external perspectives differ. Analysts believe the election season could influence the timing of rate cuts. Especially this year, inflation is following an unusual path where interest rates lag behind, making political influence appear even greater.

Mark Spindel, Chief Investment Officer at MBB Capital Partners, said, "This election will be a deep canyon for Chair Powell," adding, "Whatever Powell does, former President Trump will attack. If rates are cut, Trump will claim it is to help President Biden."

Former President Trump was notably unreserved in publicly criticizing the Fed. Since the 1990s, U.S. presidents have generally refrained from publicly commenting on the Fed, believing that emphasizing the Fed's independence benefits both the economy and the administration. However, Trump is seen as having broken this tradition. He appointed Chair Powell, a Republican, and when the trade war unsettled markets, he criticized the chair and demanded rate cuts.

Fed insiders dispute the view that the speed and timing of rate cuts are influenced by politics. Esther George, former President of the Kansas City Fed, said, "This does not affect our discussions," adding, "The Fed has already kept in mind the high risks of achieving a soft landing and lowering inflation." She continued, "In an election year, everyone reads the Fed's actions from that perspective, so the Fed is focusing on how to communicate."

WSJ assessed, "It is very difficult for Chair Powell to decide when to cut rates," and "This year, deciding on rate cuts amid the political environment of an election makes it twice as difficult."

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