No matter how hard Federal Reserve Chairman Jerome Powell tries to distance himself from politics, he just keeps getting drawn into the conversation.
And yesterday, the Federal Reserve’s FOMC (Federal Open Market Committee) decided to lower the benchmark interest rate, but this situation did not change.
It’s not surprising, but perhaps misplaced, that politicians are so focused on the Federal Reserve ahead of the presidential election.
Former President Donald Trump has previously suggested he believes both Powell and the Fed are political, and that the central bank’s powers will be used to steer the economy in favor of his rival, Sen. Kamala Harris.
Indeed, before the election, President Trump made it clear that he did not want Chairman Powell to cut the base rate, suggesting that doing so would put his job at risk.
(Meanwhile, President Trump and his running mate for the White House, J.D. Vance, have suggested that the Federal Open Market Committee should work more closely with politicians, with Vance positioning this famously failed idea as a more “democratic” alternative to the current system. But that relationship would begin under the Trump administration.)
Why oppose interest rate cuts now?
The cut in the base rate signals a number of positive factors, including the expected continued normalization of inflation, cheaper borrowing, a supported labor market and relatively affordable prices.
Republicans protest that these new developments benefit the current Democratic administration and presidential candidate Vice President Kamala Harris, but the Fed just announced a rate cut yesterday.
Not only did Chairman Powell announce the first rate cut in more than four years, he also confirmed a 50 basis point cut, double the 25 basis points (bps) that Wall Street had generally expected.
Republicans quickly fired back.
President Trump characterized the decision as bad for the economy and a “political stunt.”
“Either the economy is really bad or they’re playing politics,” he told a crowd at PubKey, a bitcoin-themed bar in New York City. “But it was a big cut,” he added, according to The Hill.
Republican Senator Tommy Tuberville of Alabama agreed on X, saying, “The Fed’s big rate cut is shamelessly political. The central bank has no right to move interest rates so close to an election, and they’re clearly trying to tilt the balance in Kamala Harris’ favor.”
Why the Federal Reserve is Apolitical
While Powell personally holds political views (he is a registered Republican), he has made it clear that his work at the Federal Reserve, like that of his colleagues on the FOMC, is apolitical.
He reinforced that stance at a press conference yesterday, telling reporters, “This is my fourth run for president of the Federal Reserve, and it’s always the same.”
“We always come into this meeting and ask ourselves, ‘What is the right thing to do for the people that we serve?’ We do that and make a decision as a group and announce it. That’s how it always will be, never anything else. Nothing else will be discussed.”
There’s a reason people like JPMorgan CEO Jamie Dimon think consumers aren’t too worried about the Fed cutting rates: Monetary policy tweaks don’t trickle down to the pockets of the general public overnight.
Chairman Powell made this point himself yesterday, adding, “I want to point out that our actions will, in most cases, have delayed effects on economic conditions.”
Thus, if Powell had voluntarily abdicated the FOMC’s federally mandated independence (and succeeded in circumventing the scribes who take public notes at each meeting), the move to cut rates would have happened months ago.
Moreover, Democratic politicians seem similarly unimpressed with Powell’s decision-making.
“Today’s rate cut is yet another admission by Chairman Powell that he waited too long to lower rates,” Sen. Elizabeth Warren (D-Mass.) wrote on X. “The Fed has finally reversed course and accomplished its dual mandate: prices and jobs. Lower rates mean relief for consumers and homebuyers. We need more rate cuts.”
Powell’s Political Background
While some may believe that Trump’s distrust of Powell stems from political differences, it was a Republican president who originally nominated her for the post.
At the time, Trump said he was confident that Powell, who served as undersecretary of the Treasury under Republican President George H.W. Bush, “has the wisdom and leadership to steer our economy through any challenge.”
Powell was clearly impressed and was re-nominated as chairman by the Democratic Biden administration.
“Fundamentally, if we want to build on this year’s economic success, we need stability and independence at the Federal Reserve,” President Biden said in 2021. “After the challenging past 20 months, I am confident that Chairman Powell and (Federal Reserve Vice Chairman) Dr. Brainard will provide the strong leadership our country needs.”