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The Federal Reserve is expected to cut interest rates, improving Biden’s prospects

By Jarrett Renshaw and Howard Schneider

WASHINGTON (Reuters) – The U.S. Federal Reserve is on track to cut interest rates as the presidential campaign season heats up, potentially leading to the president’s election Joe Biden a boost as polls show Americans dislike his handling of the economy.

The Fed could play an outsized — and potentially uncomfortable — role in the election year by helping shape attitudes toward stubbornly high inflation and rising housing costs that have hampered Biden’s reelection efforts. Rate cuts will also invite critics – Republican challengers Donald Trump Chief among them is that the claim that an agency has been established as an independent monetary authority tips the political balance toward Biden.

In fact, Trump isn’t even waiting for the first rate cut before making that claim, telling Fox Business last month that he expects Fed Chairman Jerome Powell — whom Trump installed as central bank chief in 2018 and soon resented — “to do this.” “something that will probably help Democrats…if he lowers interest rates.”

Trump’s concern – and Biden’s likely optimism – on the issue is understandable, given that consumers, fatigued and angered by the strongest inflation since the Reagan administration, are now putting up with high interest rates.

“Interest rate cuts are very popular with people. “They will really help boost confidence in the economy, especially as people pay more attention to the election,” said Celinda Lake, a top pollster in Biden’s 2020 campaign who recently conducted private polls on the subject for a client . “People really feel like they’re being exploited until Sunday.”

Too slow to matter?

In poll after poll, Americans rank the economy at or near the top of their most important issues in the election year, and the outlook outlined by Federal Reserve officials at last week’s meeting tends to be bright for Biden. Officials’ forecasts suggest he will benefit from a growing economy, low unemployment, moderate inflation and also cheaper credit by Election Day on Nov. 5.

Investors now expect rate cuts at two of the Fed’s four meetings between now and then, in mid-June and again in mid-September, decisions that Biden could then cite as evidence that the worst of inflation is over and that could influence voters’ perceptions of the economy.

Although the Fed only controls the overnight interest rate for banks, cuts to that benchmark, set at 5.25% to 5.50% since last July, quickly lead to lower mortgage rates, cheaper auto loans and more favorable financing terms for small businesses. The question is whether what is expected – about half a percentage point of cuts before voters go to the polls – will be enough to tip the balance.

Lindsay Owens, director of the Groundwork Collaborative, a progressive Washington think tank, is skeptical that this will be the case. With low unemployment, strong economic growth and still-worrying inflation, the Fed will cut interest rates too slowly to help Biden too much politically, she said.

“We’ve been in a high interest rate environment for 23 years and another one or two basis point cut of 25 basis points before November doesn’t change the fact that mortgage rates will be high,” Owens said.

“THIS LITTLE OUTFIT”

Polls consistently show that Americans rate Biden poorly for his handling of the U.S. economy, due in large part to the rising costs of food, gasoline and other essentials that have squeezed the poor and middle classes. Biden has spent much of the last year touting the strong economy, but the efforts have done little to change Americans’ negative attitudes.

The University of Michigan’s widely followed consumer sentiment index plunged to a record low in June 2022 as inflation hit its highest level in four decades at 9.1%. Sentiment is now about halfway between this value and pre-pandemic averages.

The evolving dynamic between Biden, the economy and the Fed contrasts with what former Presidents Jimmy Carter and George HW Bush experienced in the late 1970s and early 1990s, when inflation and Fed rate hikes arguably hurt their re-election chances. Both lost.

For the Fed, the current outlook, if it meets expectations, would be a unique triumph in itself. Aggressive rate hikes in 2022 and 2023 brought a painful wave of inflation under control without triggering a recession, and now a turn toward rate cuts may be so close that the central bank is closer to declaring victory.

During a campaign stop in Philadelphia earlier this month, Biden previewed how he will implement the Fed’s decisions. He talked about his efforts to reduce housing costs for Americans and made a prediction.

“I can’t guarantee it, but I’ll bet you – I’ll bet you that interest rates will go down even further, because I’ll bet you that the small business that sets the interest rates will go down,” Biden said.

The White House later clarified that Biden expressed his view on the economy and did not make recommendations to the independent Fed, underscoring the political tightrope that Biden and his campaign must walk when it comes to the central bank.

“BIDENFLATION”

Republicans have used the Fed’s rate hikes to bash Biden and link them to his mismanagement of the economy.

“Under Joe Biden, the Fed has raised interest rates to their highest level in 23 years — making life more difficult for families already struggling with the effects of Biden inflation,” said Anna Kelly, spokeswoman for the Republican National Committee.

Trump, who has his own tangled history with Powell, will undoubtedly take note of rate cuts. He promoted Powell, a then-Fed governor, to chairman but quickly clashed with him over raising interest rates. He accused him of trying to ruin the economy and at one point almost declared him an enemy of the people.

Trump has made blaming Biden for inflation a central theme of his campaign rallies and has not hesitated to portray Powell as a political actor who will take actions that could benefit his Democratic rival.

In his Fox Business interview with Maria Bartiromo last month, Trump said he believed Powell wanted to cut interest rates “to maybe get people elected.”

North Carolina State economics professor Michael Walden has some advice for Powell, who faces harassment from one camp or another regardless of what the Fed ultimately does with interest rates.

“Whatever the source of the criticism, Chairman Powell should be prepared to cover his ears in the coming months,” he said.

(Reporting by Jarrett Renshaw, Howard Schneider; Additional reporting by Nathan Layne; Editing by Dan Burns and Andrea Ricci)

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