I cover the Fed.
The Federal Reserve is independent from politics. That doesn’t mean that politics is independent of the Federal Reserve.
Today, America’s central bank will almost certainly cut borrowing costs from a two-decade high. More cuts are likely before the end of the year. The reason is economic: Inflation has come down from its 2022 peak, and unemployment has climbed. The Fed doesn’t need to squeeze the economy as tightly as it did to bring prices under control. Also, keeping rates too high for too long could seriously hurt the job market.
But cutting borrowing costs right now — just weeks before the election — pushes Fed officials into the middle of a political battle they would prefer to avoid. Donald Trump, the Republican candidate, says a rate cut before the election would be a bid to help Democrats. And while President Biden and Vice President Kamala Harris have both mostly avoided talking about the Fed, other prominent Democrats have called for lower borrowing costs; it would help the economy on their watch.
Central bankers say they ignore the political calendar when they weigh their decisions. They have the freedom to do that: Because Fed officials do not answer to the White House, they have the independence to make decisions — even politically unpopular ones — based solely on inflation and employment.
But that won’t stop politicians from turning the Fed into a talking point. In today’s newsletter, I’ll explain why.
Election booster
Independence is important to the Fed. Back in the 1970s, it seemed to bend to pressure from the Nixon White House as it kept interest rates too low for too long. That mistake helped to drive runaway inflation, and it has haunted central bankers ever since.