US Federal Reserve set to cut interest rates, potentially boosting economy

WASHINGTON ― The Federal Reserve is set to cut interest rates on Wednesday, boosting the economy in the crucial months before the Nov. 5 presidential election.

There is no doubt that the Fed will cut rates. But the magnitude of the cut, the first since March 2020, is uncertain, amid broader uncertainties about the strength of the labor market and the Fed’s willingness to revive the economy. A deeper rate cut could anger former President Donald Trump, who repeatedly threatened the Fed’s independence.

“They usually try to avoid making changes as an election approaches, but sometimes the riskiest thing to do is do nothing,” said Erica Groshen, a senior economic adviser at Cornell University and a former vice president in the research and statistics group at the Federal Reserve Bank of New York.

“The fact that they are willing to move suggests that they are seeing very clear signals that they are not willing to ignore,” Groshen told HuffPost, “and the biggest risk comes not from actually implementing these changes, but from political actors who would like to launch unfounded attacks against them.”

Progressives, however, say the risk of recession is too great to let Trump’s threats get the upper hand. Sen. Elizabeth Warren (D-Mass.), a frequent critic of Federal Reserve Chair Jerome Powell, has said the Fed should cut interest rates aggressively.

“The Fed increases the likelihood that the United States will eventually enter a recession every day it delays or slightly increases interest rates. “It indicates that they’re trying to maintain control of an economy that doesn’t need these kinds of restrictions,” Warren told HuffPost. “It’s that simple.”

The central bank has been raising rates at a steady pace starting in 2022, aiming to halt rapid consumer price inflation. With prices now rising at rates close to pre-pandemic levels, a rate cut of any magnitude would amount to something of a “mission accomplished” for the Fed.

Many economists expected the rate hikes to trigger massive layoffs, but unemployment has remained historically low as the economy appears to have achieved the soft landing that Powell and his allies had envisioned.

Unemployment rose modestly to 4.2%, while the consumer price index, the main measure of inflation, showed prices rose just 2.5% in July from a year earlier – the smallest increase since February 2021, and close to the 2% level seen as ideal for keeping unemployment low and prices stable.

“They’ve done a great job so far. We’ve gotten closer“We are heading towards a softer landing than we have experienced in the past with monetary policy aimed at slowing inflation,” Groshen said.

But Lindsay Owens, executive director of the progressive think tank Groundwork Collaborative, said it was too early to pull out the party banners and “declare total victory.”

“It’s probably acceptable to say that the war on inflation has been won, but I think we need to wait a little longer to be sure that we are secure in the labor market,” she said.

With voters still unhappy with the country’s economic performance, the White House is eager to highlight its successes in the final weeks of the election campaign.

Lael Brainard, a national economic adviser who served on the Fed’s board of governors, defended the administration against criticism that its response early in the COVID-19 pandemic was too costly and created the inflation the Fed has been struggling to control ever since. The surge was caused by several factors, she said.

“The fact that inflation declined while employment continued to grow provides good evidence that the surge in inflation was associated with several superimposed shocks related to the pandemic and Russia’s invasion of Ukraine that dissipated over time,” Brainard said in prepared remarks to the Council on Foreign Relations this week.

Higher interest rates help fight inflation by making money more expensive to borrow, which encourages businesses and households to borrow less and spend less. Businesses then slow price increases to retain customers. Lower rates could boost business investment, make new mortgages more affordable and spur hiring.

Trump suggested in an interview with Bloomberg Last month he said the Fed should not cut rates before the election, though he has said little about it since.

“Maybe they’ll do it before the election, before November 5th, even though it’s something they know they shouldn’t do,” Trump said.

As president, Trump often called on Powell to cut rates. Since leaving the White House, he has suggested that presidents should have more influence over the central bank.

There is no doubt that a rate cut will happen. Powell said in a statement August speech that inflation had slowed enough to warrant a change in monetary policy.

“My confidence has grown that inflation is on a sustainable path back to 2%,” Powell said, citing the easing of supply constraints, along with the Fed’s efforts to curb demand, as the main factor behind the improvement.

“The time has come for policy to adjust,” he said.

The biggest question Wednesday is how much Fed governors will cut their benchmark rate. Most market analysts expect a quarter-point cut, while progressives are calling for more. By Tuesday afternoon, bond traders were increasingly betting on a half-point cut.

Warren has been sharply critical of Powell for raising rates more aggressively than she thought necessary and for waiting too long to make cuts. In a letter released Monday, she urged Powell to cut rates by three-quarters of a percentage point.

“The jobs numbers are slowly adjusting, so the Fed should accelerate rate cuts to avoid sliding into a potential crisis,” Warren said in the letter, along with Sens. Sheldon Whitehouse (D-R.I.) and John Hickenlooper (D-Colo.).

But starting with a relatively large cut of half a percentage point or more would carry its own risks, according to Neil Shearing, chief economist at Capital Economics, a London-based analyst firm.

“If Fed officials opted for a deeper cut, it could be interpreted as a sign that the Fed knows something worrying about the economy that markets are ignoring. So how markets would react would be uncertain,” Shearing wrote in a research note to clients.

Groundwork’s Owens says the data show that monetary policy is too tight now and has been for some time, which justifies a deeper cut. One reason rates are still too high, she says, may be political — and Fed officials’ concerns that the cut will be seen as an attempt to help Harris win in the fall.

“You have to wonder why we’re so far behind,” Owen said, estimating that the “neutral” range for the Fed’s key interest rate would be around 2.5% instead of more than 5% currently.

“I don’t know exactly what’s going on here,” she said.