With January and February inflation prints coming in hotter than expected, there was some belief the Fed might take a more cautious position on future rate cuts. The Fed’s apparent willingness to brush off this data along with other inflation signals gives rise to speculation that Powell is doing what he can to keep the stock market buoyant heading into the November election.
Is Powell playing politics?
While Powell was originally nominated by Trump, he was renominated by Biden and is generally viewed as an establishment creature. He, like all past and future Fed officials, disavows any political motivations. It’s of course impossible to know what he’s truly thinking.
One possibility is that he simply wants to cling to the previously signaled course of action, just to appear politically unbiased. A change in direction with the election so close could be interpreted as a politically motivated maneuver, even if it is justified by the data.
Election year precedents
It’s interesting too look back at history and see how the Fed has behaved in election years. Over the last 40 years, the Democrat candidate has not won in any year in which the Fed was lifting rates.
This could be sheer coincidence, but if one had to speculate as to a causal relationship, a reasonable inference might be that the electorate veers to the party of big government in periods of economic uncertainty and weakness. Clinton won in ‘92 against the backdrop of a recession, Obama won in ‘08 as the financial crisis unfolded, and Biden won in ‘20 amidst Covid.
Although the Fed is now in a position of dropping rates, the context is totally different versus those three prior elections. In each of those years, the Fed was easing due to weakening economic conditions. In 2024, the Fed is easing as it attempts to bring rates down from unusually high levels as inflation normalizes.
