This year is set to be a big one for Federal Reserve officials: They are expecting to cut interest rates several times as inflation comes down steadily, giving them a chance to dial back a two-year-long effort to cool the economy.
But 2024 is also an election year — and the Fed’s expected shift in stance could tip it into the political spotlight just as campaign season kicks into gear.
By changing how much it costs to borrow money, Fed decisions help to drive the strength of the American economy. The central bank is independent from the White House — meaning that the administration has no control over or input into Fed policy. That construct exists specifically so that the Fed can use its powerful tools to secure long-term economic stability without regard to whether its policies help or hurt those running for office. Fed officials fiercely guard that autonomy and insist that politics do not factor into their decisions.
That doesn’t prevent politicians from talking about the Fed. In fact, recent comments from leading candidates suggest that the central bank is likely to be a hot topic heading into November.
Former President Donald J. Trump, the front-runner for the Republican nomination, spent his tenure as president jawboning the Fed to lower interest rates and, in recent months, has argued in interviews and at rallies that mortgage rates — which are closely tied to Fed policy — are too high. It’s a talking point that may play well when housing affordability is challenging many American families.
Still, Mr. Trump’s history hints that he could also take the opposite tack if the Fed begins to lower rates: He spent the 2016 election blasting the Fed for keeping interest rates low, which he said was giving incumbent Democrats an advantage.
President Biden has avoided talking about the Fed out of deference to the institution’s independence, something he has referenced. But he has hinted at preferring that rates not continue to rise: He recently called a positive but moderate jobs report a “sweet spot” that was “needed for stable growth and lower inflation, not encouraging the Fed to raise interest rates.”
The White House did not provide an on-the-record comment.
Such remarks reflect a reality that political polling makes clear: Higher prices and steep mortgage rates are weighing on economic sentiment and turning voters glum, even though inflation is now slowing and the job market has remained surprisingly strong. As those Fed-related issues resonate with Americans, the central bank is likely to remain in the spotlight.
“The economy is definitely going to matter,” said Mark Spindel, chief investment officer at Potomac River Capital and co-author of a book about the politics of the Fed.
Fed policymakers raised interest rates from near zero to a range of 5.25 to 5.5 percent, the highest in 22 years, between early 2022 and summer 2023. Those changes were meant to slow economic growth, which would help to put a lid on rapid inflation.
But now, price pressures are easing, and Fed officials could soon begin to debate when and how much they can lower rates. Policymakers projected last month that they could cut borrowing costs three times this year, to about 4.6 percent, and investors think rates could fall even further, to about 3.9 percent by the end of the year.
Officials have also been shrinking their big balance sheet of bond holdings since 2022 — a process that can push longer-term interest rates up at the margin, taking some vim out of markets and economic growth. But officials have signaled in recent minutes that they might soon discuss when to move away from that process.
Already, the mortgage costs that Mr. Trump has been referring to have begun to ease as investors anticipate lower rates: 30-year rates peaked at 7.8 percent in late October, and are now just above 6.5 percent.
While the Fed can explain its ongoing shift based on economics — inflation has come down quickly, and the Fed wants to avoid overdoing it and causing a recession — it could leave central bankers adjusting policy at a critical political juncture.
Former and current Fed officials insist that the election will not really matter. Policymakers try to ignore politics when they are making interest rate decisions, and the Fed has changed rates in other recent election years, including at the onset of the pandemic in 2020.
“I don’t think politics enters the debate very much at the Fed,” said James Bullard, who was president of the Federal Reserve Bank of St. Louis until last year. “The Fed reacts the same way in election years as it does in non-election years.”
But some on Wall Street think that cutting interest rates just before an election could put the central bank in a tough spot optically — especially if the moves occurred closer to November.
“It will be increasingly uncomfortable,” said Laura Rosner-Warburton, senior economist and founding partner at MacroPolicy Perspectives, an economic research firm. Cutting rates sooner rather than later could help with those optics, several analysts said.
And Mr. Spindel predicted that Mr. Trump was likely to continue talking about the Fed on the campaign trail — potentially amplifying any discomfort.
Since the early 1990s, presidential administrations have generally avoided talking about Fed policy. But Mr. Trump upended that tradition both as a candidate and then later when he was in office, regularly haranguing Jerome H. Powell, the Fed chair, on social media and in interviews. He called Fed officials “boneheads,” and Mr. Powell an “enemy.”
Mr. Trump had nominated Mr. Powell to replace Janet L. Yellen as Fed chair, but it did not take long for him to sour on his choice. Mr. Biden renominated Mr. Powell to a second term. Mr. Trump has already said he would not reappoint Mr. Powell as Fed chair if he was re-elected.
Of course, this would not be the first time the Fed adjusted policy against a politically fraught backdrop. There was concern among some economists that rate cuts in 2019, when the Trump administration was pushing for them, would look like caving in. Central bankers lowered rates that year anyway.
“We never take into account political considerations,” Mr. Powell said back then. “We also don’t conduct monetary policy in order to prove our independence.”
Economists said the trick to lowering rates in an election year would be clear communication: By explaining what they are doing and why, central bankers may be able to defray concerns that any decision to move or not to move is politically motivated.
“The key thing is to keep it legible and legitimate,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. “Why are they doing what they are doing?”
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