The Federal Reserve’s decision to cut interest rates by half a percentage point gives consumers a much-needed psychological boost ahead of November’s presidential election.
Analysts expect any economic impact of the first rate cut in four years to be modest, and some see it as having only a marginal impact on the vote.
But that could move the needle in an election where Democratic Vice President Kamala Harris is virtually tied with her Republican rival, former President Donald Trump.
Confidence
Voters consistently name the economy as their top concern.
In a close election race like 2024, “rate cuts at the margin help Vice President Harris,” Oxford Economics senior economist Nancy Vanden Houten told AFP.
Tokyo bounces on weak yen as Asian traders praise big US rate cut
Interest rate cuts typically lower borrowing rates over time, putting more money in consumers’ pockets, which in turn fuels demand in the economy.
But that takes time — something Harris doesn’t have, given the election is less than seven weeks away.
“We might not see a huge difference in the economic data, but one thing it might do is boost consumer sentiment a little bit,” he added.
U.S. consumer confidence rose for much of the 2010s under Barack Obama and Trump before being rocked by the start of the Covid pandemic from which it has yet to recover, according to survey data from the Conference Board.
“Price of Eggs”
Given the lags with which monetary policy operates, any economic benefits from the Fed’s rate cut are unlikely to be felt before the election, according to KPMG chief economist Diane Swonk.
“The Fed has no horse in this race,” she wrote in a recent blog post, adding, “That won’t stop politicians on both sides of the aisle from blaming the Fed.”
France’s new prime minister warns of a “very serious” economic situation
It is also difficult to guarantee that a cut in interest rates will have a positive impact on the economy, given all the other factors shaping it.
“The economy is not going to go one way or the other as a function of a 50 basis point rate cut,” EY chief economist Gregory Dako told AFP.
“Most people have no idea what the Fed Funds rate is,” Davis Wessell, a senior fellow in economics at the Brookings Institution, told AFP, referring to the bank’s key lending rate.
“They know if they got a raise. They know what the price of eggs is. They know if their kid graduated from college and couldn’t find a job,” she said.
“Given the choice we face as a society between Kamala Harris and Donald Trump, I really find it hard to believe that interest rate moves of one-and-a-half, half, even a full percentage point will really make a difference,” he said. added.
Asian markets are volatile on uncertainty over the Fed’s interest rate plan
Jobs
One area where the Fed hopes its cuts will have an impact is the labor market, which has shown signs of cooling, with unemployment rising and job creation slowing in the high interest rate environment.
By loosening monetary policy, “what the Fed is doing is making borrowing cheaper, and that, if the world was business as usual, would make it easier for businesses to borrow, to invest, to expand,” Brookings’ Wessel said.
“So it should have a beneficial impact on the labor market,” he added.
“To some extent, the expectation of rate cuts has caused interest rates on things like mortgages to already start to come down,” said Oxford Economics’ Vanden Houten.
“But I think the path the Fed took yesterday was a little bit more aggressive in terms of how quickly they’re going to cut rates,” he continued.
“This, ultimately, is useful for consumers in terms of buying things with borrowed money,” he added.
Source: AFP