Jerome Powell ensured Congress that cuts were coming in 2024. The question remains whether it will be before or after the November US elections.
During his mandated visit to Capitol Hill in Washington, Fed Chairman Jerome Powell expressed his most recent reading on the current monetary outlook. Interest rates, he concluded, will definitely come down in 2024, but later than markets expect.
“The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” Powell said. This was a direct quote from the latest Federal Reserve meeting, where the committee decided to maintain rates at the current level.
Powell and the committee need to address “the incoming data”, he said. February inflation, unemployment rate, consumption, and price levels will be released in the coming weeks.
January’s PCE, the Fed’s preferred inflation indicator, fell to 2.4%, per market expectations. This gave the committee a signal that inflation is cooling down, albeit still too slow to consider early cuts.
One thing appears more certain: the US economy will avoid a recession. GDP is set to grow over 2% in 2024, after doubling expectations last year. This revelation sent markets on a rally today, with the S&P 500 en route to break historic highs again this year.
The political question
During his visit to Washington, Powell will certainly face political pressure to cut rates from Congress. Although the Federal Reserve is formally apolitical, the 2024 elections will play a huge role in its short-term decisions.
With Nikki Haley suspending her presidential run, Donald Trump remains the only Republican candidate for the 2024 elections. He will most likely face incumbent president Joe Biden, who will run for the Democratic Party.
Trump never made secret his disdain for Powell. His victory would almost ensure a change in leadership, together with most congressional roles.
Moreover, Democrats are pressuring Powell to cut rates early, giving much-needed respite to the American middle class and ensuring economic growth ahead of the vote. Under President Joe Biden, the American economy grew at a much faster pace than under Donald Trump. However, a cut in interest rates will confirm victory against inflation and a boost in Biden’s electoral chances.
According to historian Allan Lichtman, who correctly predicted the outcome of every US election since 1984, Biden has the economy on his side. According to Lichtman’s “13 keys” system, an incumbent president has more chances of being re-elected if the short and long-term economy has an overwhelmingly positive outlook.
But if the Fed decides to postpone rate cuts further, this may undo Biden’s achievements so far. And that would likely cost him the election.
