Fed faces bipartisan political heat as 1st rate cut moves closer to Election Day

Increased political pressure as the US nears Election Day in November will add extra heat on the Federal Reserve as officials navigate just when to start cutting benchmark interest rates.

Market watchers have pushed their projections of Fed rate cuts later in the year than they originally expected, with the first drop anticipated in September, just months before the US presidential election, according to the CME FedWatch Tool, a key measure of market expectations for the benchmark federal funds rate.

The timing is likely to force the Fed to contend with political heat from both major parties, analysts said. Democrats, eager to boost President Joe Biden's reelection odds, may press for lower rates to boost growth should the economy stumble or appear weak. Republicans, meanwhile, may try to paint any Fed policy move as an orchestrated attempt by the central bank to prevent a second term for Donald Trump, who has long criticized the Fed.

"No matter what they do, election years always put a spotlight on the Fed's credibility," Satyam Panday, chief US economist at S&P Global Ratings, said in an interview. "I am sure [Fed officials] are concerned about the perception, but they also know that it is a lose-lose situation."

'Tune them out'

The Fed, which boosted rates by 525 basis points from March 2022 to July 2023, has been hesitant to cut rates as inflation remains stubbornly above the central bank's 2% target and the job market stays relatively resilient. Fed officials set policy independently of the White House and Congress, and while Congress oversees the central bank, it has no direct influence over rate decisions.

This has rarely stopped past presidents and lawmakers from weighing in on the Fed's potential next moves. Trump, the presumptive Republican presidential nominee, publicly criticized Fed Chairman Jerome Powell for raising rates and later for not lowering them enough. If elected, Trump reportedly wants more consultation with the Fed on rate decisions.

Biden has not publicly decried the Fed's lack of recent rate moves, but said in April that he would bet the Fed would soon lower rates.

"Regrettably, there are a large number of very vocal politicians in Washington who are always willing to pressure the Federal Reserve on a daily basis regardless of whether it is an election year," Michael O'Rourke, chief market strategist at JonesTrading, said in an interview. "The pressure is omnipresent. The Fed's best path is to always tune them out."

Powell has dismissed any speculation that election-year politics would influence the Fed.

"We just don't go down that road," Powell said during his May 1 press conference after the Fed's latest meeting. "We're on the road where we're serving all the American people and making our decisions based on the data and how those data affect the outlook and the balance of risks."

Timing the cut

With inflation still well above the Fed's 2% target, it is unclear when the data could meet central bankers' criteria for the first cut of this cycle. The Fed meets three times before Election Day — June, July and September — and its November meeting is just two days after ballots are cast.

To not appear political, Powell and other Fed officials may choose to leave interest rates unchanged at their September meeting if they are on the fence about cutting, Matthew Weller, global head of research with FOREX.com and City Index, said in an interview.

"The Fed strives to be seen as apolitical, and that has historically made the central bank less likely to make changes to interest rates directly before a big election, with few exceptions," Weller said.

Still, if layoffs materially increase between now and the election, the partisan calls for a rate cut will only increase, according to Panday with S&P Global Ratings.

"Naturally, voices will be louder given election optics," Panday said.

The increased political pressure will likely only force the Fed to be more deliberative before its next move, with Powell making the case for any move based on data, O'Rourke with JonesTrading said.

"The Fed's best protection from criticism is making data-dependent policy decisions," O'Rourke said. "Any rate cut decision during an election year will create political backlash, thus the Fed's best path is to make decisions it believes best for the economy."