Try as he might to extract himself from politics, Federal Reserve chair Jerome Powell just keeps getting dragged into the conversation.
And yesterday’s decision by the Fed’s FOMC (Federal Open Market Committee) to lower the baseline interest rate did nothing to change that situation.
It’s unsurprising—but arguably misplaced—that politicians’ attention is focused so firmly on the Fed in the run up to a presidential election.
Former president Donald Trump previously suggested that both Powell and the Fed are political creatures and believes central bank power would be used to sway the economy in favor of his rival, Kamala Harris.
In fact, Trump had explicitly stated he didn’t want Powell to cut the base rate before the election—suggesting the chairman’s job would be on the line if he did.
(On the other hand Trump and his running mate for the White House, JD Vance, have suggested the Federal Open Market Committee (FOMC) should work more closely with politicians—with Vance framing the famously unsuccessful notion as being a more “democratic” option than the current arrangement. But that relationship would start under a Trump administration.)
Why fight against a rate cut now?
A cut to the base rate signals a raft of positive factors: inflation can be expected to continue normalizing, borrowing becomes cheaper, the labor market is supported and prices are relatively more affordable.
Despite protestations from the GOP that these green shoots would benefit the current Democratic administration—and its presidential nominee, VP Kamala Harris—a cut is precisely what the Fed announced yesterday.
Not only did Chairman Powell announce a cut—the first of its kind in more than four years—he confirmed a reduction of 50 basis points (bps), double the 25bps axe that Wall Street had generally been expecting.
Republicans wasted no time in pushing back.
Trump painted the decision either as a negative reflection on the economy, or “playing politics.”
“The economy would be very bad, or they’re playing politics, one or the other,” he told an audience gathered at New York’s bitcoin-themed bar, PubKey. He added, per The Hill: “But it was a big cut.”
Tommy Tuberville, the Republican senator for Alabama, echoed on X: “The Fed’s drastic rate cut is shamelessly political. Our nation’s central bank has no business moving rates this close to an election and is clearly trying to tip the balance in favor of Kamala Harris.”
Why the Fed isn’t political
While Powell does have political views in an individual capacity—he is a registered Republican—he has been explicit that his work in a Federal Reserve capacity is apolitical, as is that of his FOMC peers.
It’s a stance he doubled down on in his press conference yesterday, telling reporters: “This is my fourth presidential election at the Fed and it’s always the same.
“We’re always going into this meeting and asking ‘What’s the right thing to do for the people we serve?’ We do that and we make a decision as a group and then we announce it. That’s always what it is, it’s never about anything else. Nothing else is discussed.”
There’s also a reason the likes of JPMorgan CEO Jamie Dimon believe consumers aren’t really that concerned with Fed rate cuts: monetary policy tweaks don’t filter through into the pockets of Joe Public overnight.
Powell made this point himself yesterday, adding: “I would point out that the things that we do really affect economic conditions for the most part with a lag.”
As such, if Powell had taken it upon himself to dispose of the FOMC’s federally-mandated independence (and managed to outwit the transcribers who take publicly available notes at each meeting) the move to lower rates would have been carried out months ago.
Moreover, Democratic politicians are apparently equally unimpressed by Powell’s decision-making.
“This cut in interest rates is yet another acknowledgement that Powell waited too long to reduce rates,” wrote Sen. Elizabeth Warren (D-Mass.) On X. “The Fed has finally changed course to follow its dual mandate on prices and jobs. Lower rates mean relief for consumers and aspiring homeowners. More rates cuts are needed.”
Powell’s political background
One might assume that Trump’s mistrust of Powell stemmed from political differences, but it was the Republican president who first nominated Powell for the role.
At the time Trump said he was confident that Powell—a former undersecretary of the Treasury under Republican President George H.W. Bush—”has the wisdom and leadership to guide our economy through any challenges.”
Powell clearly impressed, and was renominated as chairman by the Democratic Biden Administration.
“Fundamentally, if we want to continue to build on the economic success of this year we need stability and independence at the Federal Reserve,” President Biden said in 2021. “I have full confidence after their trial by fire over the last 20 months that Chair Powell and [vice chair of the board of governors of the Federal Reserve System.] Dr. Brainard will provide the strong leadership our country needs.”