Why Kamala Harris is advantaged by this Fed decision

ECONOMY – A shock decision a month and a half before the American presidential election. For the first time since 2020, the American central bank (Fed) lowered its rates on Wednesday, September 18, hitting hard with a half-point drop. Proof that the battle against inflation is being won.

Fed rates are now in a range of 4.75% to 5%, after spending more than a year at their highest level since the turn of the century, at 5.25% to 5.50%. “This decision reflects our growing confidence that with an appropriate recalibration of our policy, the strength of the labour market can be maintained.”Federal Reserve Chairman Jerome Powell said at a news conference.

Further cuts are on the horizon, as Fed officials plan to lower rates by another half-point in total by the end of 2024. Jerome Powell has indicated that this is the “beginning (of a) process” monetary policy change to avoid a slowdown in the labor market.

Giving Americans back purchasing power

Although the Fed is independent of political power, its decision could give Kamala Harris a boost. Indeed, the rate cut helps the party in power and therefore the Democratic vice president, who is running for president against Donald Trump.

Lower interest rates make it cheaper for Americans to borrow money to buy a home or start a business, the New York Times in its newsletter. This reduction will restore purchasing power to households, which have been stuck for several years between high inflation and high credit costs.

It’s a boon for Democrats, who have been criticized for soaring inflation since Joe Biden came to power, and while the economy is the issue that most concerns Americans in the presidential election. But it’s also a risk for the Fed, which could find itself projected into the American campaign without wanting to.

The Federal Reserve’s Dilemma

Jerome Powell tried to assure that political considerations did not enter into the central bank’s decisions: “We ask ourselves: What is the right thing to do for the people we serve? And that’s what we do (…). It’s never about anything else. Nothing else is discussed.” And to add: “We don’t serve any politician, any political figure, any cause, any issue, anything.”

Which did not stop Republican Donald Trump from grumbling. “Such a significant drop shows (…) that the economy is either in very bad shape or that they are playing the politicians’ game”he said after the Fed’s announcement. However, nothing means that the rate cut will have a significant impact on the race for the White House.

As the New York Times still in his newsletter, the American central bank would have been criticized no matter what its decision. Either it lowered rates before the election and was accused of favoring the administration in power. Or it waited until the election was over, but the Democrats would have accused it of being in the pocket of the Republicans. Between a rock and a hard place, the Fed had to make its choice.

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