The Fed’s long-awaited rate cut is colliding with presidential politics

(CNN) — The Federal Reserve cut interest rates for the first time in the Biden era on Wednesday after the White House spent the last three years grappling with Americans’ dissatisfaction with the cost of living, raising new questions about the health of the economy and the impact on voters at the ballot box.

The move is fresh vindication for President Joe Biden, whose pandemic-era agenda ushered in trillions of dollars in government spending — which, when coupled with strong demand for goods, supply chain snarls and Russia’s war with Ukraine — drove inflation to a four-decade high.

The half-percentage-point cut could indicate the elusive “soft landing” — experts’ favored term for raising borrowing costs to slow the economic activity while avoiding severe joblessness — has been reached. Biden, who has publicly touted the Fed’s policy independence, will speak at the Economic Club of Washington, DC, on Thursday and likely tout an economy that’s come full circle in four years.

“We just reached an important moment: Inflation and interest rates are falling while the economy remains strong,” Biden wrote on X after the Fed’s announcement. “The critics said it couldn’t happen – but our policies are lowering costs and creating jobs.”

But the rate cut could also suggest the economy, which is showing signs of stress, is in need of a jolt. Although most mainstream economists agree a recession is not around the corner, 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 could be politically motivated.

With less than 50 days until Election Day, another question has emerged: Will the rate cut matter to voters?

Nevada real estate agent Zoila Sanchez told CNN’s John King that lower interest rates would bring welcome relief to residents looking to buy a house or refinance.

“Prices are extremely high, the highest they’ve ever been,” Sanchez told King. “The affordability is not there for everyday people.”

Homebuyers taking out a mortgage and homeowners who refinance could see their monthly payments drop. In fact, they already have – mortgages are based on bond yields, which have fallen in recent weeks in anticipation of a rate cut. Borrowing for cars and carrying credit card balances will also eventually become cheaper. And, if the Fed pursues a larger cut, the stock market could rise further from record highs it’s been setting this week – impacting the retirement accounts of Americans with 401(k) plans and the portfolios of the smaller share of Americans who own stocks.

But most economists say the effects will be muted or delayed, pointing to the moves the market already made when Powell telegraphed in August that rate cuts were coming. Mortgage rates began falling then. Financial markets touched and remain near record highs.

According to Jason Furman, former President Barack Obama’s onetime chief economist, it could take well into 2025 for any cut to spur broad changes in economic behavior.

“It’s barely going to affect any aspect of the economy before Election Day,” Furman told CNN. “It’s already priced into the market, and it’s way too soon to affect something like unemployment, GDP or inflation.”

Data crunched by the St. Louis Federal Reserve shows that it takes at least nine months for higher interest rates to contract economic activity and, in response, lower prices. And it takes roughly 12 months before lower interest rates are felt by consumers.

And some data indicates voters already have historically made up their minds on the economy months before Election Day.

President George H. W. Bush enjoyed 5.8% economic growth in the three months immediately preceding Election Day. But unemployment had peaked at a troubling 7.8% in June 1992, a concern that – along with Democrat Bill Clinton’s “It’s the economy, stupid” tagline – led voters to ditch Bush and elect Clinton.

Aaron Klein, a senior fellow in economics at the Brookings Institution, said some voters have given Vice President Kamala Harris a slight poll bump on her handling of the economy because they didn’t want to support Biden or Trump’s policies.

“The key metric for incumbent vote share is how voters felt in April, May, June,” Klein told CNN. “Voters’ mindset about the Biden-Harris administration is already baked.”

Still, both sides of the aisle have shown that they think lower rates could help consumers – and ultimately voters – who have been beset by high costs for a long time.

Harris responded to the rate cut by saying she’s focused on bringing down prices. “While this announcement is welcome news for Americans who have borne the brunt of high prices, my focus is on the work ahead to keep bringing prices down,” she said in a statement.

But Trump and his team are suggesting, without evidence, that the central bank lowered borrowing costs by half a percentage points for political reasons.

“I guess it shows the economy is very bad to cut it by that much, assuming they’re not just playing politics,” Trump said Wednesday in New York. “The economy would be very bad or they’re playing politics, one or the other. But it was a big cut.”

Steve Moore, an economic adviser to Trump, said the economy merits a quarter-point cut but believes the Fed should have done it sooner.

“I think this was a political decision by the Fed and will jeopardize the perception of the Fed’s ‘political independence,’ which Powell sanctimoniously seeks to protect,” Moore told CNN.

Powell, asked in July whether the Fed could remain apolitical if it opted to cut rates in September, was emphatic that it could.

“This is my fourth presidential election at the Fed,” Powell said. “Anything we do before, during, or after the election, will be based on the data, the outlook, and the balance of risks.”

Trump said in an August news conference that he believes the Fed acts on a “gut feeling” and that a president “should have some say” in how the Fed acts. He later backed off that stance.

Moore told CNN ahead of the rate cut announcement that Trump doesn’t necessarily want the Fed to be more closely tied to the White House but does want there to be more transparency behind the central bank’s decision-making. In a second term, Trump could call for regular audits and real-time disclosures, rather than weekslong delays before minutes are published from the closed-door sessions.

“There should be C-SPAN cameras in every meeting,” Moore said.

This story has been updated with reaction to the Fed’s rate cut announcement.

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