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.
