The Federal Reserve cut interest rates by 0.5 percentage points (50 basis points) on Tuesday, putting it at the center of a political storm.
Donald Trump quickly spoke out, suggesting the commission’s decision could be a “political stunt” given the proximity of the November presidential election.
Asked for his reaction while campaigning in New York City, the former president said: “Assuming they’re not playing politics, I think cuts of this magnitude are an indication that the economy is very bad. Either the economy is very bad or they’re playing politics.”
That same day, the Fed cut its key borrowing rate to 5.50% from 5.25%, and set the short-term borrowing rate for banks at 5% from 4.75%. The cut sent markets immediately rallying, but it was the biggest rate cut since the 2008 crisis relief measures that helped plunge the economy into the Great Recession.
“The Committee has increasing confidence that inflation is moving sustainably toward 2 percent and judges that the risks to achieving its employment and inflation objectives are roughly balanced,” the Fed said in a statement.
The cut is also the most politicized move by the rate-setting agency in recent years, as former President Donald Trump repeatedly called for rates to be kept stable ahead of the November election.
Trump and his advisers believe lowering borrowing costs will help Vice President Kamala Harris’ campaign by convincing the public that the economy is doing well and easing concerns about inflation.
Republican House Speaker Mike Johnson also calmly welcomed the move, calling it “welcome news for consumers,” but called the timing somewhat “suspicious.”
“The night before the election? I don’t know. I’m just curious,” he said, according to CNN.
President Joe Biden and Vice President Kamala Harris both offered glowing praise, with Biden calling it a “pivotal moment,” adding that he would elaborate on the issue in his speech on Thursday.
Harris said in a statement that the rate cut was “welcome news for Americans who have borne the brunt of rising inflation,” but that her focus remained on “future efforts to keep prices lower.”
Wall Street’s reaction to the bold but widely expected move was relatively muted: Shortly after, the Dow Jones Industrial Average rose more than 350 points, nearing the all-time high it reached on Monday, before falling just over 103 points, or 0.2%, to close at 41,503.10.
The S&P 500 and Nasdaq also rose sharply initially, but the former eventually closed down 0.29% to 5,618.26 and the latter down 0.31% to 17,573.30.
While the interest rate cuts won’t immediately lower most people’s mortgages and will likely reduce some people’s monthly 401(k) payments, lower interest rates will also reduce inflationary pressures on everyday life, such as credit card bills. Lower mortgage rates could also lower the cost of buying a home, providing some relief in the sluggish housing market.
Economists also believe that high interest rates would have made a recession more likely if the Fed had not acted.
During a campaign stop in Raleigh, North Carolina, on Wednesday, Republican vice presidential candidate J.D. Vance was asked by a reporter for his reaction to the rate cut. He added that the rate cut “would ease inflation for a lot of people,” to which the crowd immediately booed.
“Here’s my response: Half a point is nothing compared to what American families have been dealing with over the last three years,” Vance said with a grin.
The Fed, under Chairman Jerome Powell, who was appointed by Trump and then publicly disowned by him, decided to cut rates after months of declining inflation reports and slowing job growth, its first rate cut since early 2020.
Federal Reserve Governor Michelle Bowman opposed the decision, with the Fed saying she had wanted a quarter-point cut, according to The Wall Street Journal.
Bowman, who was appointed to the board by President Trump in 2018, would be the first governor to publicly oppose rate hikes since then-Governor Mark Olson opposed them in 2005 after Hurricane Katrina.
The last time interest rates were cut just before an election was in September 1992, when the economy was still emerging from a recession. In the end, then-President George H. W. Bush was defeated by Bill Clinton, who campaigned on the idea that “the economy is the problem, idiot,” but he couldn’t escape defeat.
But the move is sure to lead to major political tensions. Trump has already signaled he wants power over an independent Federal Reserve if he wins the November election. In July, Trump told Bloomberg he had no plans to fire Powell, but added, “especially if I think he’s doing the right thing.”