Harris campaign may benefit from the Fed’s large rate cut, analysts say

The campaign of Vice President Kamala Harris stands to benefit from the Federal Reserve Board’s recent decision to slash it’s benchmark interest rate by half a percentage point, as that is expected to gradually and indirectly decrease the inflationary pressure being felt by millions of Americans, analysts said.

“Seemingly this more-than-expected cut would benefit Harris,” Boragan Arouba, a professor of economics at the University of Maryland, told Baltimore Post-Examiner.  “However, realistically, it is virtually impossible for the effects of a rate cut to be felt instantaneously on the economy. So any actual effects may take a while. However, low interest rates always look good for incumbent administrations. Having said all this, none of these considerations matter for the Fed. In “modern” times (say, since Volcker) the Fed and more specifically the FOMC has been very independent.”

“The incumbent administration, in this case VP Kamala Harris,” said George Georgiou, a professor of economics at Towson University.  “This is to be expected from previous research as it relates to the ‘political business cycle’ of elections.  This is especially true given that it is the last meeting of the FOMC before the upcoming presidential election.”

However, Arabinda Basistha, a professor of economics at West Virginia University, said the answer of who benefits is less than clear.

“The political gains and losses from the large cut by the Fed are hard to predict as they depend on the outcomes that will play out in the next 6-7 weeks. To the extent this cut may support to the job market, and not slow down the gains in inflation, it may help the current administration. However, it can help a future change in the administration if there is any worsening of inflation, and the unemployment rate continues to rise.”

The central bank’s Federal Open Market Committee (FOMC) voted on Wednesday to lower its target range for the federal funds rate to 4-3/4 to 5 percent. The decision was backed by Chairman Jerome Powell and 10 of the other 11 members on the committee.

It is the first rate cut since 2020 and marks a pivotal turning point in the Fed’s stated mission to bring inflation back down to 2%.

Two more rate cuts are possible later this year and several more are possible in 2025, Powell has said.

The Fed only has the power to cut its own interest rate. But in doing so there are larger ramifications for the entire economy: banks likely will follow suit by lowering interest rates on home and car loans. Credit card companies also are expected to act in kind to make borrowing even less expensive.

Much of the U.S. economy operates on the availability of credit, as many Americans cannot afford to pay for many items out of pocket.

The Fed decision comes about six weeks before Harris faces off against her Republican opponent, former President Donald Trump. Trump first nominated Powell Fed Chair in 2018. President Joe Biden then renominated Powell as chair in 2021.

Powell saw the economy through the COVID-19 pandemic when markets tanked and panic ensued and the Fed cut interest rates down to zero to help bring about a recovery.

Powell is widely viewed as a neutral arbiter consistent with the Fed’s tradition of independence from political considerations.

However, that has not stopped Trump from verbally abusing Powell from time to time. Following last week’s rate cut, Trump blasted the decision as “political” in nature ostensibly designed to benefit Harris.

Trump has consistently argued that the policy decisions of the Biden-Harris administration are to blame for what had been arguably the worst inflationary pressure since the 1970s.

But some economists say that that is not necessarily a fair assessment because the pandemic forced the adoption of massive economic stimulus measures to ensure that the financial system did not collapse. Moreover, there is a consensus that supply chain issues related to the pandemic also contributed to inflation.

Why did the Fed cut rates and will that help the economy? 

“The Fed has begun to reduce interest rates because they are increasingly confident that inflation is coming down to their 2% target,” said John Burger, a professor of economics at Loyola University Maryland. “The reduction in inflation means households are no longer experiencing rapid increases in the price of food, gas, rent, etc. It is important to note that the Fed’s goal is not to bring prices back down, but rather to stop the rapid increase in prices. Now that inflation is under control the Fed has shifted policy such that households will benefit from lower mortgage rates, lower interest rates for car loans, and eventually lower rates on credit card debt.”

“The decrease of the federal funds rate by 0.5% is generally expected to have a positive, i.e. stimulative effect on economic activity, contributing to a higher rate of growth, business investment, and spending on the part of both consumers and businesses as the cost of borrowing money decreases and lowering the cost of existing debt,” Georgiou said. “The average American can expect lower mortgage rates, auto loan rates,  and credit card borrowing rates.”

“The immediate impact will be on the borrowing rates the consumers face, though rates such as mortgage rates follow long-term (10-year) treasury rates, which don’t always respond one to one to changes in the policy rate,” Aruoba said. “Looking at this rate, it seems it may be increased by 10 basis points since Monday, though this is probably even smaller if you look at what happened around the policy announcement. So it doesn’t look like this will influence borrowing rates by nearly as much.”

“The sharp rate cut, and the signal that more cuts will follow in the projections, seem to indicate that the Fed is more worried about the real economy now than the inflation,” Basistha said. “This may well be the current reality, but inflation still remains ‘elevated’. A slowdown in the fight against inflation may hurt the people in the longer run. The last leg of inflation reduction is slow progress, and a few more months of little to no progress in inflation may end up hurting the Fed’s credibility.

“The lower interest may help the consumers in reducing the credit card rates, and the mortgage rates have also come down from their peak. Funding costs for business operations and projects may ease a bit. However, if the positive effects on the economy are small, and the inflation situation does not improve, this may end up hurting the average Americans.”

Should Americans who don’t own stocks be concerned about interest rates? 

While about 60% of Americans are invested in the stock market, they tend to come from households that make more than $100,000 a year.

The stock market did very well under Trump, but has done even better under Biden.

It is unclear if that will have any effect on the outcome of the election, as Americans tend to view the state of the economy absent from the prism of equity prices.

Polls show a tight race between Harris and Trump.

“Although Americans who presently own stocks are flying high with historic increases in retirement and investment accounts, all Americans will benefit if the present lowering of interest rates results in a ‘soft landing’ of the economy with expanded economic growth and higher rates of employment,” Georgiou said. “Labor in recent years has also made higher than average gains in wage rates although labor continues to trail the rates of return to capital ( i.e., owners of stocks).”