The Fed’s unusually large rate cut may have a large impact on the US elections outcome.
Yesterday’s 50-point rate cut by the Federal Reserve is stirring an already tumultuous political climate in the United States. With less than two months remaining before the nation’s most important election in decades, any development could lean the final outcome in one direction or the other.
The Federal Reserve slashed interest rates for the first time in 4 years. The committee opted for an unusually large cut, 50 points instead of the standard 25 points.
This marks a psychological victory against inflation, which under President Joe Biden’s term peaked at 9.2%. In August 2024, however, inflation dropped to 2.5% year-on-year, more than expected.
With its interest rate cut, the Federal Reserve shows confidence that inflation will eventually be defeated and that the economy should receive a boost sooner rather than later. “Our patient approach over the past year has paid dividends,” Fed Chairman Jerome Powell said in the press conference following the announcement.
The rate cut is also a major political development. The vast majority of US voters consider inflation the most important issue, expressing dissatisfaction with how the current Democratic administration handled it.
On the other hand, Democratic candidate Kamala Harris points out how the economy under the Biden administration thrived. GDP growth was extremely strong, even outpacing China in some quarters. Unemployment reached its lowest level in history, remaining below 4% for the longest streak of time since the Vietnam War.
Republican response
Republican candidate and former US President Donald Trump criticized the Fed’s decision to cut rates. “I guess it shows the economy is very bad to cut it by that much, assuming that they are not just playing politics,” Trump said. “The economy would be very bad, or they are playing politics, one or the other. But it was a big cut.”
Last month, Trump urged the Fed to wait until after the elections to implement a rate cut. He promised more control over the Federal Reserve if reelected, threatening to remove Jerome Powell as Chairman if he didn’t do “the right thing”.
Trump openly admitted he wants stricter political control over the Federal Reserve. He also criticized the 50-point cut decision as being too political.
The Federal Reserve maintained the decision was completely outside of political strategy. Powell stated the committee keeps inflation and the US economy as the only factors in mind when discussing monetary policy.
Powell’s term expires in 2026. He said he wants to serve it until the end. There is no precedent of a US president removing a sitting Fed Chairman as that would certainly entail regulatory nightmares. Not to mention an immediate collapse of global markets.
