Jay Powell would very much like to stay out of politics, especially in an election year. The Federal Reserve chair doesn’t want to be perceived as having a horse in the race come November, especially when one of said horses — Donald Trump — is definitely going to be attacking him from any angle he can.
Powell, who was appointed as Fed chair by Trump and then reappointed by Joe Biden, has gone to great lengths to emphasize that the central bank is above the political fray. He has repeatedly emphasized that he and the other members of the Federal Open Market Committee are focused solely on economic data when it comes to a decision on monetary policy — which, at the moment, is whether to cut interest rates.
At a hearing Wednesday, Rep. Patrick McHenry, the Republican from North Carolina who chairs the House Financial Services Committee, noted that some people were predicting that the Fed would cut interest rates multiple times this year, while others predicted it would do nothing. The divergence between the cuts and no-cuts camps has been the biggest economic argument of the year.
“What say you?” McHenry asked Powell. The Fed chair’s response: “I say that, really, it will depend on the economy.”
Beyond the academic argument, whether the Fed cuts interest rates has a significant political bearing this year. The economy and perceptions of it will be vital factors in determining what voters do when they head to the ballot box in the fall. It’s an economy that Powell very much has a hand in shaping. Because of that, he really is in the center of the storm.
“Implicitly, explicitly, passively, or actively, the Fed is making decisions that can have high-leverage influence over the economy and economic outcomes,” Skanda Amarnath, the executive director of the advocacy group Employ America, said. “The Fed matters to the state of the economy, and the state of the economy isn’t irrelevant to electoral outcomes.”
At the moment, the US economy is in pretty good shape. The labor market is robust, and growth is strong. Inflation is coming back down, though it’s not yet at the Fed’s 2% target. A soft landing — meaning things settle back down to earth without a recession — is in view. Still, while consumer sentiment has improved from where it was, say, six months ago, it’s not great. Inflation has cooled, but prices are still higher than they used to be. So are interest rates, which the Fed hiked to combat inflation. Voters are unhappy about higher prices, and they feel weighed down by high interest rates, too. A recent working paper from former Treasury Secretary Larry Summers and a group of economists found that high borrowing costs were a major driver weighing down people’s moods.
“Consumers, unlike modern economists, consider the cost of money part of their cost of living,” the authors wrote.
It tracks. Interest rates may seem abstract, but they can have a real impact on how people view their financial situations. If you’re in the market for a house right now, mortgage rates are eye-popping compared with a few years ago. Maybe you waited for car prices to settle, only to discover now that you can’t afford a loan. Or you run a small business, and suddenly the cost of borrowing keeps you up at night.
The Fed matters to the state of the economy, and the state of the economy isn’t irrelevant to electoral outcomes.
The White House can’t go back in time and reverse the sudden rise in inflation — in which the Fed, by waiting too long to raise interest rates, had a hand. But lowering interest rates should make people feel better about economic conditions and could give Democrats and Biden a boost. While the Fed has projected that it will start cutting rates at some point this year, the timing is an open question. March? May? June? Later? The answer to that question could seriously influence the outcome in November.
“Interest rates are a big reason why people are frustrated, independent of inflation, independent of whatever other economic outcomes may be frustrating,” Amarnath said.
I’m not saying anything new here — Trump says it, too. He’s well aware lower interest rates would boost the economy, lift people’s moods, and, ultimately, help the party in charge. It’s why he publicly worried the Fed would lower interest rates to help Hillary Clinton’s presidential bid ahead of the 2016 election and repeatedly berated Powell and the Fed over interest-rate increases while he was in the White House.
The Fed is an independent body designed to be outside politics, so it’s not subject to short-term pressures as it tries to steward the economy. There have been moments in the past when presidents have tried to sway it — often with disastrous results. Richard Nixon pressured the Fed to keep interest rates low before his reelection, which helped cement the disastrous inflation of the 1970s. Ronald Reagan got the message to the central bank on his wants during his presidency, getting his chief of staff to tell then-Fed Chair Paul Volcker not to raise rates ahead of his reelection campaign. Volcker wasn’t planning to raise rates anyway. In recent decades, however, most presidents shied away from saying much, until Trump. Most observers take Powell at his word that the Fed is not going to take politics into account in interest-rate decisions, even in an election year. But that doesn’t mean he exists in a bubble, either.
“I don’t think Powell is thinking about whether Trump or Biden will tell him to cut or hike rates,” said Elizabeth Pancotti, the director of special initiatives at Roosevelt Forward, a sister organization of the progressive think tank the Roosevelt Institute. “It might affect how he messages the rate hikes or cuts.”
Even in non-election years, Fed officials are incredibly cautious with their words. The political optics could make them even more so.
“I take Powell at his word that they’re not making policy with an eye to explicitly putting their finger on the scale for one party or one presidential candidate over the other, but the Fed certainly has to manage political risk,” Sarah Binder, a political scientist at George Washington University, said. Full FOMC-meeting transcripts, which are kept secret for five years, show the Fed isn’t immune to political winds. Transcripts from 2018, for example, show that officials discussed the need for political support for their decisions and were well aware of outside pressure.
“The Fed doesn’t really want to rock the boat. It doesn’t want to upset Congress. It needs Congress on its side. They don’t want Congress reopening the Federal Reserve Act,” Binder said. “The Fed can’t avoid the political winds here.”
Not everything about the economy is under the Fed’s control, of course, meaning there’s only so much Powell can be blamed for, politically or otherwise. If the avian flu strikes again and chickens start to get sick en masse, egg prices are going to go back up. The central bank can’t do much about oil and gas prices, which depend on global market forces or geopolitical turmoil. What’s more, most Americans don’t think about the Fed very much at all as a factor in their economic lives, even if it is one.
Powell is walking a tightrope right now in more ways than one. The economic risks of the Fed’s decisions are real — if it cuts rates too soon, inflation could start to pick up again, and if it waits too long, it could put too much of a damper on the economy and push the country into a recession. It’s a bit of a Goldilocks situation, except a lot more is at stake in finding what’s just right than a good night’s sleep.
“They’ve got to do the best job they can. The ante for them internally is to do this just by the book as much as possible as an institution,” Diane Swonk, the chief economist at KPMG US, said. “The Fed doesn’t have a horse in this race, and it never does, but it will always be blamed.”
Emily Stewart is a senior correspondent at Business Insider, writing about business and the economy.
