Last week, Federal Reserve Chairman Powell's support for next year's interest rate cut undoubtedly conveyed a joyful and optimistic atmosphere in the White House. The improvement in the prospects of a soft landing for the US economy is of great benefit to President Biden's re-election path. However, for Powell, his resolute turnaround before the election year may to some extent lead him into a vortex of public opinion
Due to voter anxiety about the soaring cost of living, Biden's poll approval rating has been steadily declining recently. If the United States falls into an economic recession, he will face greater resistance to winning re-election in November next year. At this point, the Federal Reserve's policy shift is clearly a timely rain for Biden, as his senior aides continue to promote strong economic momentum, including low unemployment, easing price pressures, and strong economic growth. The decline in interest rates will strengthen his position in the minds of voters.
However, the Federal Reserve may face hidden dangers as a result. Powell's recent unexpected turn may raise suspicions that he intentionally boosted Biden and Trump in another showdown. Although the Federal Reserve Chairman emphasized last week that the Fed will not consider political factors when formulating policies.
Sarah Binder, senior researcher at the Brookings Institution, pointed out that "the upcoming election will face more criticism from them (Federal Reserve officials). This will make it harder for them to maintain their credibility and formulate good monetary policies."
Although the US job market has remained strong and the overall economic performance has been resilient, the significant rise in prices since Biden took office has left American voters disappointed with his economic handling.
A poll released by Morning Consult last Thursday showed that former President Trump has an advantage in voters' views on economic policies. When asked which leader they trust more to handle economic issues, Trump leads Biden by 51% to 33%, and 16% of respondents say neither is trustworthy. This survey is based on responses from 4935 registered voters contacted between November 27th and December 6th.
Yale University professor Ray Fair pointed out, "In all the chatter about polls, debates, and campaign spending, what really matters is the behind the scenes factors - the quality of the economy."
After the Federal Reserve held its third consecutive meeting to maintain interest rate stability, Powell hinted last Wednesday that policymakers may have already completed raising interest rates and started discussing when to cut them. In the dot matrix forecast released after the meeting, officials predict that interest rates by the end of next year will be about 75 basis points lower than they are now.
"The expected interest rate cut will greatly help alleviate voter dissatisfaction with Biden's economic policies," said Tobin Marcus, US policy and political director and former Biden advisor at Wolfe Research. "The highest mortgage interest rate in a generation is one of the last serious abnormal economic developments, and now that the peak of inflation and the impact of the pandemic have passed, we believe that voters' feelings will be better next year as interest rates normalize."
The White House silently applies pressure
Although the Biden administration did not repeatedly bombard the Federal Reserve like its predecessor - Trump even threatened to fire Powell - the Biden administration did not actually adopt a complete "silence" on central bank issues.
Last year, when inflation was rampant, Biden and his team generally supported the Federal Reserve in controlling inflation by raising interest rates. But now, with the easing of price pressures, their tone has changed - but to be fair, the tone of the Federal Reserve has also changed!
On December 8th, when commenting in Nevada, Biden praised the November employment report, which unexpectedly dropped the unemployment rate from 3.9% in October to 3.7%, as a "sweet spot" and believed that this was consistent with lower inflation rates and should support the view that there was no need for further interest rate hikes.
US Treasury Secretary Yellen went further last week, stating in a media interview on December 13th that as inflation rates decline, interest rate cuts are "natural". But she emphasized that she is not telling the Federal Reserve what to do.
And when asked if the Fed's "last mile" of restoring inflation to the 2% target would be the most painful mile, Brenard, Biden's director of the National Economic Council and former high-ranking member of the Federal Reserve, like Yellen, also counterattacked. The former Vice Chairman of the Federal Reserve said last Friday, "I understand that perhaps a year ago the data and inflation trajectory were still very vague. And today I don't understand why this statement is still being made."
Powell's tricky part
For Powell, the current challenge is that if there is a substantial deterioration in the US economy next year and the risk of an economic recession increases, then Federal Reserve decision-makers have political reasons to lower interest rates. But if the economic situation is more favorable for Biden's victory - the job market remains stable and inflation rates fall, the Federal Reserve may find it harder to dispel suspicion that it is helping the current president if interest rates are lowered at this time.
&Amp; Quota; They (the Federal Reserve) may find themselves in a tricky situation; Quota; "If Trump ultimately becomes the Republican nominee for president, then once Powell relaxes interest rates, he will attack Powell," said Joseph Lavorgna, the US Chief Economist of SMBC Nikko Securities, who previously served at Trump's White House
Currently, Trump, who is far ahead in party nominated polls, has been merciless in his criticism of the Federal Reserve in 2018 and 2019- he has repeatedly criticized Powell for tightening monetary policy too tightly. Although Powell himself was promoted by Trump - he initially nominated Powell to replace former Federal Reserve Chairman Yellen, Biden subsequently nominated Powell for another four-year term in 2022.
Powell has repeatedly emphasized recently that political factors will not affect the Federal Reserve's deliberations. Senior Wall Street figures such as Goldman Sachs Chief Economist Jan Hatzius have also stated that the history of central banks in recent years has proven this. Therefore, many Federal Reserve observers believe that the tendency of Federal Reserve decision-makers next year is to stay as far away from political turmoil as possible.
One possible impact of this is that, under equal conditions, it may indicate that Federal Reserve officials are more willing to take action before the presidential campaign heats up, rather than hastily taking action before the November election. As time goes by, the closer the election approaches, the higher the threshold for the Federal Reserve's actions may also be, as policymakers may want to avoid getting themselves caught up in the vortex of the election.
Mark Zandi, Chief Economist of Moody's Analytics, pointed out that Powell does not want to become Komi. He refers to former FBI Director James Comey, who was criticized for affecting the 2016 election for making remarks about Hillary before the vote.
He said, "As the election approaches, the threshold for the Federal Reserve to raise or lower interest rates may be quite high."