(CNN) – The Federal Reserve on Wednesday cut interest rates for the first time in the Biden era after the White House spent the past three years grappling with Americans’ dissatisfaction with the cost of living, raising new questions about the health of the economy and the impact on voters at the polls.
The move is a fresh vindication for President Joe Biden, whose pandemic-era agenda ushered in trillions of dollars in government spending that, combined with strong demand for goods, supply chain bottlenecks and Russia’s war with Ukraine, pushed inflation to a four-decade high.
The half-percentage point cut could signal that the elusive “soft landing” — pundits’ favorite term for raising borrowing costs to slow economic activity while avoiding severe unemployment — has been reached. Biden, who has publicly touted the Fed’s policy independence, will speak at the Economic Club of Washington on Thursday and will likely tout an economy that has come full circle in four years.
But the rate cut could also suggest that the economy, which is showing signs of strain, needs a jolt. While most established economists agree that a recession is not around the corner, they also suggest that the economy is not out of the woods yet.
With less than 50 days until Election Day, another question has arisen: Will voters care?
Nevada real estate agent Zoila Sanchez told CNN’s John King that lower interest rates would be a welcome relief for residents looking to buy or refinance a home.
“Prices are extremely high, the highest they have ever been,” Sanchez told King. “Affordability is not there for ordinary people.”
Homebuyers who take out a mortgage and homeowners who refinance could see their monthly payments reduced. In fact, they already have: Mortgages are based on bond yields, which have fallen in recent weeks in anticipation of a rate cut. Borrowing to buy a car and carrying credit card balances will also eventually become cheaper. And if the Fed pursues a bigger cut, the stock market could rally even higher from the record highs it has been hitting this week, weighing on the retirement accounts of Americans with 401k plans and on the portfolios of the smaller share of Americans who own stocks.
But most economists say the effects will be muted or delayed, pointing to moves the market already made when Powell telegraphed in August that rate cuts were coming. Mortgage rates began to fall then. Financial markets hit and remain near record highs.
According to Jason Furman, President Barack Obama’s former chief economist, any cuts could take well into 2025 to trigger broad changes in economic behavior.
“It’s hardly going to affect any aspect of the economy before Election Day,” Furman told CNN. “It’s already priced into the market, and it’s too early for it to affect anything like unemployment, GDP or inflation.”
Data compiled by the St. Louis Federal Reserve show that it takes at least nine months for higher interest rates to contract economic activity and, in turn, lower prices. And it takes about 12 months before lower interest rates are felt by consumers.
And some historical data indicate that voters already made up their minds about the economy months ago.
President George H.W. Bush enjoyed economic growth of 5.8% in the three months immediately preceding Election Day. But unemployment had reached a worrying 7.8% by June 1992, a concern that – along with Democrat Bill Clinton’s slogan “It’s the economy, stupid” – led voters to ditch Bush and elect Clinton.
Aaron Klein, an economics expert at the Brookings Institution, said some voters have given Vice President Kamala Harris a slight boost in polls over her handling of the economy because they did not want to support Biden or Trump’s policies.
“The key metric for the incumbent’s vote share is how voters felt in April, May and June,” Klein told CNN. “The voter mindset about the Biden-Harris administration is already set.”
Still, both sides of the aisle have shown they think lower rates could help consumers and ultimately voters who have long been plagued by high costs.
Democratic Sens. Elizabeth Warren, John Hickenlooper and Sheldon Whitehouse this week called for the Fed to cut rates even further, with a three-quarter-point cut, to encourage more borrowing. And Biden, who has been at pains to point out the Fed’s independence from the executive branch, said this spring that he believed a cut was justified.
Steve Moore, an economic adviser to former President Donald Trump, said the economy deserves a quarter-point cut, but he believes the Fed should have done so sooner.
“They have waited three years to do this, why are they doing it on the eve of the elections?”
Several members of Trump’s team believe the central bank is putting its thumb on the scale in the race, squeezing the economy under a Democratic administration to make voters feel better about their finances as they head to the polls.
Powell, asked in July whether the Fed could remain apolitical if it chose to cut rates in September, was adamant in saying yes.
“This is my fourth presidential election at the Fed,” Powell said. “Whatever we do before, during or after the election will be based on the data, the outlook and the balance of risks.”
Trump said at a news conference in August that he believes the Fed acts on “gut feelings” and that a president “should have some say” in how the Fed acts. He later backtracked on that stance.
Moore told CNN that Trump doesn’t necessarily want the Fed to be more closely tied to the White House, but he does want more transparency in the central bank’s decision-making. In a second term, Trump could call for regular audits and real-time disclosures, rather than weeks-long delays before minutes of closed-door meetings are released.
“There should be C-SPAN cameras at every meeting,” Moore said.
