Decisions about interest rates, Fed officials say, are based solely on how the economy evolves, and whether inflation keeps trending down. Federal Reserve Chair Jerome H. Powell reiterated that stance during two days of congressional testimony this week.
“We do not consider politics in our decisions. We never do. And we never will,” Powell said on CBS News’s “60 Minutes” last month. “And I think the record — fortunately, the historical record really backs that up.”
In his testimony, Powell told lawmakers the next move isn’t yet decided.
“The economic outlook is uncertain, and ongoing progress toward our 2 percent inflation objective is not assured,” Powell said.
But rate cuts — which aren’t expected to start until sometime this summer — could read differently on the campaign trail. The Biden administration, for one, is playing up strong growth, a booming job market and easing inflation. Yet the president’s polling on the economy — especially on inflation — is weak, and his campaign would probably benefit from rate cuts that ease steep prices for mortgages, car insurance and business investment. (White House officials are diligent about not commenting on Fed policy, sticking to a longtime custom that President Donald Trump often abandoned.)
Meanwhile, Trump, the likely Republican nominee again this year, has capitalized on higher-than-normal inflation to attack Biden’s record. Trump has also called out high mortgage costs at his rallies, and quickly resumed his old playbook of lambasting the Fed from his time in office. During an interview with Fox Business Network’s Maria Bartiromo last month, Trump said “it looks to me like [Powell is] trying to lower interest rates for the sake of maybe getting people elected, I don’t know.” Trump added: “I think he’s going to do something to probably help the Democrats, I think, if he lowers interest rates.”
The specter of the election came up among lawmakers. During Powell’s Wednesday appearance before the House Financial Services Committee, chair Patrick T. McHenry (R-N.C.) said it was “highly inappropriate for lawmakers to attempt to influence monetary policy.”
“Chairman Powell, I have faith that you will not allow politics to cloud your judgment in the fight to tackle inflation,” McHenry said.
And on Thursday, Senate Banking Committee member Steve Daines (R-Mont.) told Powell: “Last time I checked, it’s going to get a little more political around here between now and November.”
If anything political is generally uncomfortable territory for Powell and his colleagues, this year will bring a particularly harsh spotlight. (First nominated to the Fed board by President Barack Obama, Powell was later nominated as Fed chair by Trump, then tapped for a second term by Biden.)
“The Fed will try very hard not just to be — but also to appear — nonpartisan during what is likely to be a pretty toxic election season,” said Krishna Guha, vice chairman of Evercore ISI and a former top official at the New York Fed. “First and foremost, the way they will try to do that is sticking to their knitting, and trying to be super rigorous about doing the job Congress has mandated them to do.”
The Fed closely guards its independence from politics. That’s because policymakers make decisions that will shape the economy for years to come. Their goal is to keep prices stable and help the labor market grow as much as possible. Much of the rest they readily leave to Congress or the White House.
Analysts point to the Fed’s track record over decades. Last week, a report from JPMorgan found that no matter the economic circumstances, the central bank “continued to pursue its dual mandate irrespective of elections.”
Wells Fargo put it this way: “We do not think the election will play a major role in driving monetary policy decisions. … The Federal Reserve takes its independence very seriously, and the past 30 years of history suggests that macroeconomic conditions are the dominant force guiding monetary policy.”
But the central bank doesn’t operate in a vacuum, either. To get an accurate read on the economy, the Fed tracks what is happening in Washington, paying close attention to potential crises like a government shutdown or debt ceiling deadline. It accounts for immigration trends and major policies like Trump’s tax cuts and Biden’s sweeping stimulus package. Powell also consistently interacts with lawmakers, maintaining strong relationships with Republicans and Democrats on Capitol Hill. He also has regular breakfasts and meetings with Treasury Secretary Janet L. Yellen, a former Fed chair herself.
Plenty of Fed officials have said they aren’t rushing to start cutting, especially after January’s inflation report came in hotter than expected. Right now, rates are at their highest level in decades, after the Fed sprinted to tame inflation over the past few years. Now central bankers have penciled in cuts that would give the economy a bit more breathing room — so long as they’re convinced inflation is falling to normal levels.
Yet even if inflation keeps trending down, the messaging could get complicated.
The Fed’s calendar has quirks. So far, officials have signaled three rate cuts this year, and Powell has hinted that they wouldn’t start until the middle of the year. That has analysts increasingly looking to the Fed’s June meeting. After that, Fed officials convene in late July, mid-September, the first week of November and mid-December.
That means the Fed could end up cutting rates at a steady pace before Election Day.
At the same time, the Fed doesn’t like to commit to specific rate moves much in advance; the economy has swerved so many times that officials prefer to keep their options open.
The result: It would be extremely out of character for officials to dictate a set of decisions well ahead of November. But that could also leave the door open for outside critics and observers to tie cuts later in the year to the political calendar.
Tim Duy, chief U.S. economist at SGH Macro Advisors, said that as the months go by, the Fed will need a stronger and stronger case for rate cuts. Unless the economy starts to falter, it could become harder for the Fed to justify waiting late in the year to trim, simply because of the proximity to the election.
“As you get closer to the election, the idea of cutting on inflation alone, I think, has increasingly bad optics,” Duy said. “Because the question is, ‘Why are you cutting rates?’ If growth is still strong, what’s the need for cutting rates?”
Guha, of Evercore ISI, said the Fed could help itself by establishing a kind of “default glide path.” At some point, officials could use economic data to gently set expectations for back-to-back cuts, or trims at every other meeting, without saying those decisions are final.
“In an ideal world, you would settle into a regular cadence of cuts,” Guha said. “Your decisions have a regularity to them, and it doesn’t look like you’re throwing the steering wheel one way or the other right in front of the election.”
For now, the Fed is clear in its focus: Do the job no matter what.
“Integrity is priceless,” Powell said on “60 Minutes.” “And at the end, that’s all you have. … We plan on keeping ours.”