Following a weaker-than-expected jobs report, the Federal Reserve is now expected to cut interest rates ahead of this year’s presidential election.
The employment data for April released Friday showed that the economy added 175,000 jobs, down from 315,000 the month before. It was also a fairly big miss, as economists were predicting some 125,000 more jobs would be added. The unemployment rate also ticked up to 3.9%.
Because the report came in much weaker, it means that the Fed might end up cutting interest rates sooner than previously expected, likely ahead of the November elections. That is a bit of good news for President Joe Biden, as the prospect of higher interest rates through the contest was unwelcome.
Recent inflation reports have come in hotter than anticipated, with the consumer price index rising to 3.5% in March. Because of the hotter inflation prints, most investors began to expect that the Fed would hold off on cutting rates until after the November election. But the latest report shows that the labor market could be weakening, and deterioration could force the Fed’s hand to cut sooner.
Following the weaker jobs report, investors are now implying about a 70% probability that the Fed will pare back its interest rate target ahead of the election, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
That is a big swing from just a few days ago when investors were betting that the first rate cut would not come until November or December.
Inflation and higher interest rates have crushed Biden’s economic approval with voters, even though historically speaking unemployment is low. Team Biden is hoping for a rate cut, which would lower rates on mortgages, auto loans, and other consumer products.
Some Republicans have argued that the Fed, which is supposed to be independent, could end up trying to trim rates in order to help Biden — but Fed Chairman Jerome Powell has pushed back on that notion and said that the Fed only acts in the best interest of the economy.
A couple of months ago, former President Donald Trump, the presumptive Republican presidential nominee, slammed Fed Chairman Jerome Powell (who he appointed) and argued that Powell is planning to lower interest rates to aid Democrats in the coming election.
“I think he’s political,” Trump said in an appearance on Fox Business back in February. “I think he’s going to do something to probably help the Democrats, I think, if he lowers interest rates.”
Following the Friday jobs report, House Majority Whip Tom Emmer (R-MN) blasted the Biden administration’s stewardship of the economy and warned against the Fed dabbling in election-year politics.
“Unemployment is up, job growth is down, and Bidenomics continues to be a disaster for the American people,” he told the Washington Examiner. “It would be a blatant abuse of power for the Biden administration to weaponize the Fed to compensate for their failed policies in an election year.”
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There has historically been a firewall between presidential administrations and the Fed but Trump has pushed that envelope before. While in office, Trump criticized Fed policy, blasting the central bank for raising interest rates too quickly. It was reported Trump had private discussions about firing Powell, although Powell said at the time he didn’t believe that Trump had the authority to fire him.
In 2019, Trump notoriously wrote that his “only question is, who is our biggest enemy” — Powell or Chinese leader Xi Jinping.