Gordon L. Weil
A dozen people will meet behind closed doors next month and
make a decision that will heavily influence the presidential election and might
even decide it.
They are not politicians. They are a group of almost
anonymous economists and bankers who will set the interest rate affecting
everything from mortgages and housing to credit cards and pensions.
Its decision will have an immediate and nationwide impact. That’s
more real change than most economic policy actions by the president. And it could also determine the election.
The group bears a technical sounding name: the Federal Open
Market Committee or FOMC. But its effect
is hardly technical. It is coldly
practical, and its decision will cascade through the economy the minute it is
announced at two o’clock on the afternoon of September 18. This will come at the end of the only FOMC
meeting scheduled before the elections.
The FOMC is poised to lower interest rates. That’s a big deal and is expected to be
politically popular. Coming while a
Democratic president holds office, the lower rates could boost the Democrats’
election chances. Yet the decision will
be a judgment based on economic factors, information available to the public,
and not on politics.
The FOMC supports the Federal Reserve, which has two major
tasks – keeping employment high and inflation low. It’s a balancing act, because promoting one
goal can produce negative results for the other.
Many people have faced a higher cost of living and assign
blame to high interest rates. Whatever
the underlying factors, a majority holds President Biden responsible, with
inflation being a key contributor to his unpopularity. Lower rates and resulting lower prices could
boost the chances of Kamala Harris.
Donald Trump has been an advocate of lower interest rates, a
position that has political appeal. He
has come to dislike the rate policy of Jerome Powell, the person he had
appointed as the Fed chief. Recently,
Trump has favored waiting to lower rates to deny political help to the
Democrats.
Trump backers have suggested that presidents ought to take
part in setting interest rates. If the
president played such a role, it would be like their having a say in Supreme
Court decisions. Now, the president’s
role with both the Supreme Court and the Federal Reserve Board consists of
appointing their members.
Presidents are supposed to keep away from these economic
decisions. Otherwise, short-term
politics can seriously harm the national economy. Leading central banks around the world, like
the Fed, are kept independent of political leaders by law.
The Federal Reserve has traditionally kept its distance from
presidential politics, especially following a major crisis about 50 years ago
when Fed policy got too close to a campaign. Since then, they have been a carefully
reserved Reserve.
The FOMC is composed of twelve members: the seven members of the Board of Governors
of the Fed, appointed by the president for 14-year terms, plus five
representatives of regional Federal Reserve banks. The FOMC votes are made public, and, unlike
the Supreme Court, there is remarkable agreement among the members, no matter
their political affiliation.
Following the Great Recession of 2008 and the Covid crisis
beginning in 2020, employment fell, eventually leading the FOMC to stimulate
the economy by setting interest rates at zero.
Then, as the economy improved, it raised rates to block inflation by
slowing business investment.
Its policy worked. First,
unemployment was sharply cut. Then, the
FOMC raised rates back to traditional levels.
Price increases have slowed, but so has employment growth.
Here’s where politics comes in. People had grown accustomed to the low
interest rates used to stimulate the economy.
When the FOMC increased rates, it intended to slow economic growth and reverse
inflation. But many people liked low
rates, so grew unhappy with the FOMC interest policy.
The Fed has tried to bring about what is called a “soft
landing.” In dealing with both
employment and inflation problems, it had to avoid pushing too hard either way,
because it wanted to avoid a recession.
That’s a tough challenge, not always popular, and it seems to be
working. But the Fed has struggled to
get the right timing for its moves.
If, by its decision in September, the FOMC lowers costs in
the economy, almost everybody will take that as good news. Their new optimism, probably accompanied by
higher stock market values, could have a political effect. With Trump now holding a slight lead on his ability
to handle the economy, it could help Harris.
The cut won’t be huge, either a quarter or a half percent,
but it will produce lower costs for people and businesses. In this short campaign, that could be a big
influence on how people vote. Let’s see
how the hot politics of a cold economic decision play out.
