CNN
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The Federal Reserve on Wednesday cut interest rates for the first time under the Biden administration after the White House spent the past three years grappling with American dissatisfaction with the cost of living, raising new questions about the health of the economy and its impact on voters.
The move represents new legitimacy for President Joe Biden, whose pandemic-era policies have introduced trillions of dollars of government spending that have combined with strong demand for goods, disruptions to supply chains and the war between Russia and Ukraine to send inflation to its highest level in four decades.
The half-percentage-point cut could signal that a “soft landing” — experts’ preferred term for raising borrowing costs to slow economic activity while avoiding severe unemployment — has been achieved.Biden, who has publicly touted the Fed’s policy independence, is likely to tout an economy that has come full circle in four years when he speaks at the Economic Club of Washington, D.C., on Thursday.
“We have reached a pivotal moment: Inflation and interest rates are falling, while the economy remains strong,” Biden wrote on X after the Fed’s announcement. “Critics said this could not happen, but our policies are lowering costs and creating jobs.”
But a rate cut could also signal that an economy showing signs of stress needs stimulus. While most mainstream economists agree that a recession is not on the horizon, they also suggest the economy is not out of the woods yet.
Vice President Kamala Harris called the rate cut “welcome news,” while former President Donald Trump suggested without evidence that the decision may be politically motivated.
With less than 50 days until Election Day, another question is emerging: Will lowering interest rates make sense to voters?
Nevada real estate agent Zoila Sanchez told CNN’s John King that the lower interest rates will come as a welcome relief to residents looking to buy or refinance a home.
“Prices are so high, they’re at an all-time high,” Sanchez told King. “They’re not affordable for the average person.”
Homebuyers taking out mortgages and homeowners refinancing could see lower monthly payments. In fact, they already are. Mortgages are based on bond yields, which have fallen in recent weeks in anticipation of rate cuts. Auto loans and credit card balances will also eventually get cheaper. And if the Fed cuts rates further, stocks could rise even further from the highs they hit this week, affecting the retirement accounts of Americans with 401(k) plans and the portfolios of the few Americans who hold stocks.
But most economists say the impact will likely be muted or delayed, pointing to moves markets already made when Powell warned of a rate cut in August. Mortgage rates began to fall then, and financial markets hit record highs and are still hovering around those levels.
It could take until 2025 for interest rate cuts to prompt broader changes in economic behavior, according to Jason Furman, former chief economist under President Barack Obama.
“It’s not going to have much of an impact on the economy until Election Day,” Furman told CNN. “It’s already priced into the markets and it’s too early to tell what the impact will be on unemployment, GDP or inflation.”
According to data analyzed by the Federal Reserve Bank of St. Louis, it takes at least nine months for higher interest rates to reduce economic activity and lead to a corresponding decline in prices, and it takes about 12 months for consumers to feel the effects of lower interest rates.
And some data suggests that voters historically have already made up their minds about the economy months before Election Day.
President George H. W. Bush enjoyed 5.8 percent economic growth in the three months leading up to Election Day, but unemployment had reached an alarming peak of 7.8 percent in June 1992, and this concern, combined with Democrat Bill Clinton’s catchphrase “The economy is the problem, idiot,” led voters to abandon Bush and choose Clinton.
Aaron Klein, a senior fellow in economics at the Brookings Institution, said Vice President Kamala Harris’ approval rating has increased slightly on economic policy because some voters are unwilling to support either Biden or President Trump’s policies.
“A key measure of the incumbent’s vote share is how voters felt in April, May and June,” Klein told CNN. “Voters’ views on a Biden-Harris administration have already been solidified.”
Still, both parties have indicated they believe lower taxes would help consumers, and ultimately voters, who have long been plagued by high costs.
Harris responded to the rate cut by saying she was focused on lowering prices. “Today’s announcement is good news for Americans who have been hit hard by high prices, but my focus is on our work ahead to keep prices down,” she said in a statement.
But President Trump and his team claim, without evidence, that the central bank cut borrowing costs by half a percentage point for political reasons.
“Assuming they’re not playing politics, I think cuts of this magnitude are an indication that the economy is very bad,” Trump said in New York on Wednesday. “Either the economy is very bad or they’re playing politics. But these were massive cuts.”
Steve Moore, an economic adviser to President Trump, said the economy deserved a quarter-point rate cut, but he believes the Fed should have cut rates sooner.
“This is a political decision by the Fed and I think it will jeopardize the perception of the Fed’s ‘political independence’ that Chairman Powell is so hypocritically trying to protect,” Moore told CNN.
Asked in July whether the Fed could remain apolitical if it chose to cut interest rates in September, Chairman Powell stressed that it could.
“This is my fourth term as Fed chair,” Powell said. “Everything we do before, during and after the election will be based on a balance of data, forecasts and risks.”
At a press conference in August, Trump said he thought the Fed was acting on “gut feelings” and that the president “should have a say” in what the Fed does. He later walked back that position.
Moore told CNN ahead of the rate cut announcement that while Trump doesn’t necessarily want tighter ties between the Fed and the White House, he does want greater transparency in the central bank’s decision-making. In a second term, he could demand regular audits and real-time disclosure of minutes of closed-door meetings, rather than delaying their release for weeks.
“There should be C-SPAN cameras at every meeting,” Moore said.
This article has been updated to reflect reaction to the Fed’s rate cut announcement.