Inflation Is Becoming a Political Nightmare for the Fed
Futures trading suggests the central bank may not cut interest rates until September, which is the last time policymakers will meet before the November elections.
A nightmare is in the offing.
Photographer: Hulton Archive via Getty Images
The Federal Reserve has an optics problem that is mounting by the day. With another month of elevated inflation data in hand, markets now project the central bank won’t cut benchmark interest rates until at least mid-September, when policymakers meet for the last time before the Nov. 5 general election between current President Joe Biden and former President Donald Trump, a timeline that’s bound to set off accusations of political meddling. So, will policymakers choose what’s best for their reputations and that of the institution or the economy? The answer should be easy.
The Fed operates as an independent and nonpolitical organization with two monetary policy goals: full employment and stable prices. In a country that is deeply divided, it’s naïve to think even central bankers can completely block out politics, but Chair Jerome Powell’s Fed has done an admirable job — so far. Powell, a Republican appointed by Trump, had to be nimble when the former president publicly demanded that he slash rates during the White House’s trade war with China. Then, during the Biden administration, he took fire from the likes of Democratic Senator Elizabeth Warren — a member of the powerful Senate Banking Committee — for keeping rates too high for too long in a situation she claimed was hurting average Americas. In both episodes, Powell ignored the politicians, avoiding even the perception of political dealing. But it’s easier to come off as neutral while doing nothing, and this year could find the Fed forced into action in the final stretch of a toxic battle for the presidency.