Jerome Powell prepares to lower interest rates during an election year

Jerome Powell is seriousness personified. Like a good poker player, the Federal Reserve chair excels at concealing his emotions. During press conferences following monetary policy meetings, he speaks in a monotone and makes few gestures, much to the frustration of news photographers hoping for more drama. Powell is trying to subdue the highest inflation rate in four decades, a matter he never takes lightly. He seems close to reaching the target and is set to lower interest rates for the first time in over four years during an election year. While not declaring victory, there was a sense of optimism following the March 2024 monetary policy committee meeting.

Beneath the stoic mask, Powell seemed on the verge of a half-smile a few times in his press conference and even elicited some laughter in the room. When asked if his statement about the central bank starting to slow down the balance sheet reduction “fairly soon” referred to the May meeting, Powell drily replied: “Fairly soon are just words we use to mean fairly soon.” Then, when asked if he regretted his decision to hold press conferences after each monetary policy meeting (something his predecessors did infrequently), Powell slowly said, “Of course... not,” with a long pause before the last word.

The Federal Open Market Committee (FOMC) updated its forecast on March 20 regarding the monetary policy actions needed to fulfill its dual mandate of promoting maximum long-term employment with 2% inflation, the price stability goal. It’s non-binding forecast is on track for three 0.25-point interest rate cuts by the end of the year, although nine of the 19 FOMC members favored slightly smaller cuts. This forecast implies reducing rates twice before the November elections: June, September and a final cut in December.

In the polarized U.S. political climate, Powell may face pressure, but it’s not uncommon for the Federal Reserve to adjust interest rates during an election year if deemed necessary. Rates were lowered in 2020 due to the pandemic and in 2008 amid the financial crisis. Increases occurred in 2000 and 2004 to address the tech and real estate bubbles. But Powell insists that politics and elections have no influence on the Fed’s decisions. “We don’t think about politics. We think about what’s right for the economy,” he said in December 2023.

That’s the tricky part — knowing what’s right for the economy. Until a few months ago, Powell’s main concern was inflation. Now, he sees a two-sided risk. “We’re in a situation where if we ease too much or too soon, we could see inflation come back, and if we ease too late, we could do unnecessary harm to employment and people’s working lives,” he said in the March 20 press conference. Caution is one of the best virtues of any central banker.

“Overall, we believe the updated projections indicate that the Federal Reserve is set to begin normalizing interest rates in the coming months. This comes as they grapple with broader issues on inflation and the U.S. economy’s sensitivity to interest rates, which will influence the pace of future rate cuts in the next two years,” said Tiffany Wilding, an economist at PIMCO Investment Management. “We expect a total of 75 basis points in rate cuts by the end of 2024 starting in June, but short-term risks suggest fewer cuts than anticipated by Federal Reserve officials.”

At this stage, due to its delayed monetary policy actions, Federal Reserve decisions will probably not have any significant influence on the economy before the presidential elections. Contrarily, a recent report by Oxford Economics indicates that the election results could greatly impact the economy and monetary policy direction.

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