The Federal Reserve cut its key interest rate by 0.5 per cent Tuesday—thrusting it into the center of a political firestorm.
It cut its key borrowing rate from 5.25 to 5.50 per cent to 4.75 to 5 per cent. Markets rose immediately on the cut, the biggest since crisis measures taken in 2008 as the economy collapsed into the Great Recession.
But the cut is also the most politically-charged action taken in recent history by the interest-rate setting body—because former president Donald Trump had repeatedly demanded that it keep interest rates stable before the election. He and his aides think a cut in the cost of borrowing would benefit Vice President Kamala Harris’ campaign by convincing people that the economy is strong and by reducing concerns over inflation.
While a rate cut will not immediately bring down most people’s mortgages, and would reduce monthly payments on some 401ks, cheaper interest rate also reduce inflationary pressures on the everyday cost of living, such as credit card bills. Lower mortgage rates would also cut the cost of home-buying and could free up a scelerotic housing market.
The Fed, under chairman Jerome Powell—a Trump appointee who the former president has since publicly repudiated—voted for the cut after months of falling inflation reports and a slow-down in jobs growth. Economists believe that if they had not acted, high interest rates would have increased the chances of a recession.
The last time a rate cut came so close to an election was in September 1992, when the economy was still emerging from recession. It did not ultimately save then-president George H.W. Bush from electoral defeat at the hands of Bill Clinton, who had campaigned on “it’s the economy, stupid.”
But this time the move is certain to lead to major political tensions, with Trump already signaling that he would like powers over the independent Federal Reserve if he wins in November. In July, Trump had told Bloomberg he would not fire Powell but added, “especially if I thought he was doing the right thing.”
