Fed Rate-Cut Pivot Is Welcome News For Biden, But Carries Pitfalls For Powell

(Bloomberg) -- Federal Reserve Chair Jerome Powell’s pivot toward interest-rate cuts is spreading holiday cheer in the White House, where the improved prospects for an economic soft landing are a boon for President Joe Biden’s bid for another term. 

Biden has seen his poll numbers sag amid voter anxiety over a surge in the cost of living, and he would face a bigger headwind to winning another term in November if the US tumbled into a recession. As top aides continue to tout the strength of the economy — including low unemployment, easing price pressures and sturdy growth — falling rates would bolster his case to voters. 

But there are pitfalls for the US central bank. Powell’s surprising pivot risks fanning suspicions that he’s deliberately trying to give Biden a boost in his expected re-match with Donald Trump. The Fed chief said on Dec. 13 that the Fed doesn’t take politics into account in making policy.

The upcoming election “exposes them to heightened criticism,” said Brookings Institution senior fellow Sarah Binder. “It makes it harder for them to maintain their credibility and to make good monetary policy.” 

While the job market has remained strong and the underlying economy resilient, a dramatic run-up in prices since Biden took office has soured voters on his handling of the economy.

Read More: Pricier Cars, Rent and Even Pets: Why Americans Hate the Economy

A Bloomberg News/Morning Consult poll published Thursday found former President Trump with an edge on perceptions of the economy. When respondents were asked which leader they trust more to handle the economy, Trump led Biden 51% to 33%, with 16% who said neither. The poll is based on responses by 4,935 registered voters contacted between Nov. 27 and Dec. 6.

Amid all the chatter about polls, debates and campaign spending, “behind the scenes is what really matters, namely how good or bad the economy will be,” said Yale University professor Ray Fair, who’s developed a macroeconomic computer model for predicting presidential elections.

After the Fed held rates steady for the third straight meeting, Powell told reporters on Wednesday that policymakers were probably done hiking and had begun discussing when to cut rates. In projections released after the gathering, officials foresaw rates at the end of next year three-quarters of a percentage point lower than they are now. 

The anticipated rate cuts “could go a long way toward addressing voters’ discontent with Biden’s economy,” said Tobin Marcus, head of US policy and politics at Wolfe Research and a former Biden adviser. “The highest mortgage rates in a generation are one of the last acutely abnormal economic dynamics, now that peak inflation and pandemic shocks have passed, and we think voters will feel a bit better next year as rates normalize.”

While the Biden administration has steered clear of the outsized pressure Trump put on the Fed when he was in the White House – the former president at one point asked whether Powell was a greater enemy of the US than Chinese President Xi Jinping – it’s not adopted total radio silence when it comes to the central bank.

As inflation raged last year, Biden and his team were generally supportive of the Fed’s efforts to bring it under control through higher interest rates. But now, with price pressures easing, their tune has changed — though, to be fair, so has the Fed’s.

In Dec. 8 comments in Nevada, Biden touted the November jobs’ report – which saw unemployment unexpectedly drop to 3.7% from October’s 3.9% — as a “sweet spot” that’s consistent with lower inflation and should support the case that further rate hikes aren’t needed. 

Treasury Secretary Janet Yellen went further last week, telling CNBC television on Dec. 13 that it was “natural” for interest rates to come down as inflation falls. She emphasized though that she was not telling the Fed what to do.

And Lael Brainard, Biden’s National Economic Council director, pushed back when asked whether the last mile of the Fed’s bid to return inflation to its 2% goal could be the most painful.

“I understood that maybe a year ago when there was still a lot of murkiness in the data and the inflation trajectory,” Brainard, the former Fed vice chair, told reporters Friday. “I don’t get that argument today.”

Tricky Spot

Fed policymakers would have political cover for rate cuts next year if the economy deteriorates materially and the risk of recession rises.

But if the economic landscape is one more conducive to a Biden victory – a still solid jobs market with falling inflation – the Fed might find it harder to dispel suspicions that it’s acting to aid the sitting president if it reduces rates. 

“They could be stuck in a tricky spot,” said SMBC Nikko Securities America chief economist Joseph Lavorgna, who served in the Trump White House, adding, “If my old boss is the Republican nominee for president, he is going to attack Powell if he’s easing rates.” 

Trump, who’s well ahead in opinion polls in the race for his party’s nomination, was unsparing of his criticism of the Fed in 2018 and 2019. He repeatedly attacked Powell for keeping policy too tight, even though he had chosen him to replace Yellen as Fed chair. Biden subsequently tapped Powell for a second four-year term in 2022.

Read More: Trump Says He’s ‘Not a Fan’ of Powell, Wouldn’t Reappoint to Fed

Powell has repeatedly stressed that politics don’t play a role in Fed deliberations. And Wall Street veterans such as Goldman Sachs Group chief economist Jan Hatzius say recent central bank history bears that out.

Fed watchers say policymakers’ proclivity next year will be to stay out of the political limelight as much as possible. 

All things being equal, that suggests officials would prefer to act before the presidential campaign heats up, rather than immediately ahead of the November election. That could raise the hurdle for Fed moves as the year progresses because of policymakers’ presumed desire to avoid injecting themselves into the election fray.

“Powell doesn’t want to be Comey,” said Moody’s Analytics chief economist Mark Zandi, referring to former Federal Bureau of Investigation Director James Comey, who’s been criticized for affecting the 2016 election with pre-poll comments about Hillary Clinton. “As we approach the election, the bar for the Fed raising or lowering rates is probably pretty high.”

--With assistance from Josh Wingrove, Christopher Condon, Michelle Jamrisko and Lauren Dezenski.

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