Opinion | There Was Nothing Political About the Fed’s Big Interest Rate Cut

Opinion

There Was Nothing Political About the Fed’s Big Interest Rate Cut

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By Peter Coy

Opinion Writer

Was it “political” for the Federal Reserve to cut interest rates less than two months before the presidential election, as Donald Trump has charged? Not a bit. Not cutting rates is what would have been political.

On Wednesday, the Fed’s rate-setting Federal Open Market Committee cut the target range for the federal funds rate — the short-term interest rate it controls — by half a percent. A cut that big was at the high end of forecasters’ predictions. More often the Fed moves a quarter-point at a time, but the committee members apparently wanted to make sure that they didn’t fall behind the curve and allow the economy to slip into a recession.

The nub of the argument that the Fed was trying to help the Democrats is that lower rates might help the economy grow a little faster, which would in principle help the candidacy of Vice President Kamala Harris, since her party controls the White House.

Trump referred to the expected rate cut as “political stuff” during a town hall in Michigan this week. Earlier this year, in an interview with Bloomberg Businessweek, he said that an interest-rate cut by the Fed is “something that they know they shouldn’t be doing.”

John Paulson, the billionaire investor who is informally advising Trump, issued a statement noting that “the Fed claims to be above politics,” but saying the timing of the rate cut “cast doubt on its claims.” He said that although interest rates are too high, the Fed should have waited until November to start cutting them.

But the arguments of Trump and Paulson don’t hold up to scrutiny. If the members of the Fed committee had really wanted to help the Democrat get elected, they would have started cutting earlier, since it takes at least half a year, and possibly much longer, for changes in interest rates to affect the real economy.

If anything, the Fed waited too long to start cutting. Inflation has cooled, while the unemployment rate shot up to 4.2 percent last month from 3.5 percent in July 2023.

Asked the politics question at the Fed’s news conference, Powell said, “This is my fourth presidential election at the Fed. It’s always the same.”

“Our job is to support the economy on behalf of the American people,” he said, adding, “We don’t put up any other filters. If we start to do that, I don’t know where we stop.”

Unfortunately, sometimes not being political is going to look political. Under these economic conditions, for the Fed to try to dodge criticism from Trump by leaving interest rates high would have been highly political — and indefensible.