Hot inflation may cause the Fed to cut rates during the election season

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WASHINGTON, April 11 (Reuters) – Hot U.S. inflation data has put the Federal Reserve’s debate over a first interest rate cut on a potential collision course with the presidential election calendar, although a parade of top-level Fed-watching economists also predict the Fed won’t make its move until after Americans go to the polls.
Rate futures markets now show investors see a first rate cut as most likely occurring at the Fed’s Sept. 17-18 meeting after data showed inflation through the entire first quarter of 2024 was stiffer than expected and had demonstrably slowed progress on bringing it back to the Fed’s 2% target.
A rate cut then – just seven weeks before Election Day – would shine a spotlight on the Fed, which goes to pains to keep itself out of the political tussle.
No Fed official has offered a potential start date, but policymakers’ projections last month indicated on balance they still expected to deliver three, quarter-percentage-point rate cuts this year, an outlook first presented last December.
At the same time, a core of professional Fed watchers now see an outcome where the Fed misses the presidential election cycle entirely, though that doesn’t mean the central bank won’t be a campaign focus.
Biden, for his part, said he felt the Fed’s baseline outlook for rate cuts this year would prove correct, even if recent data have thrown it into doubt.
“We don’t know what the Fed is going to do for certain,” Biden said after Wednesday’s inflation report, but “I do stand by my prediction that before the year is out there will a rate cut.”
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April 11, Washington, DC (Reuters) – Hot U.S. S. The presidential election calendar may collide with the Federal Reserve’s discussion about a first interest rate cut due to inflation data, but a number of prominent economists who closely follow the Fed believe the Fed won’t act until after voters cast their ballots.

Investors, according to rate futures markets, now believe that the Fed will likely cut rates for the first time in September. Data during the first quarter of 2024 revealed that inflation was higher than anticipated and that efforts to return it to the Fed’s 2 percent target had stalled. This led to the 17–18 meeting.

A rate reduction then, just seven weeks before Election Day, would draw attention to the Fed, which makes great efforts to avoid becoming embroiled in politics. But that light won’t necessarily go out if you don’t make the cut by then.

Fed officials insist that political considerations have no bearing on their policy decisions. This includes the expectation of incumbent President Joe Biden for a mild landing of low unemployment and low inflation to last into the fall campaign season, as well as the growing argument of the presumed Republican nominee and former president Donald Trump that a rate cut by the Fed will only benefit him and his Democratic opponent.

Although no Fed official has provided a possible start date, policymakers’ projections from last month showed that they still anticipated delivering three quarter-percentage-point rate cuts this year, which was originally stated in December.

Using that as a benchmark, investors had for months agreed that the first cut would occur in June and the remaining two reductions would occur over the course of the remaining year. The schedule appeared to be well-planned around the peak of the presidential campaign, but it was thrown off course this week when the Consumer Price Index data for March continued a run of surprisingly high readings, prompting an increasing number of Fed officials to predict that there won’t be a rate change anytime soon.

Simultaneously, a subset of expert Fed observers now predict that the Fed will completely miss the presidential election cycle, though this does not preclude the central bank from being a campaign topic.

In the hours following the release of the March inflation data, analysts from JP Morgan, Bank of America, Jefferies, Deutsche Bank, and other institutions shredded their earlier forecasts that rate cuts would be well advanced by the election—possibly helping Biden—and some of them were pushed back to year-end or even 2025.

Biden would be running against the stigma of both higher borrowing costs and ongoing inflation, according to economists at Bank of America, who wrote, “We do not think the Fed will gain the confidence it needs to start cutting rates until December.”.

For his part, Biden expressed confidence that the Fed’s initial projection of rate reductions this year would come to pass, despite recent data casting doubt on it.

After the inflation data on Wednesday, Biden stated, “We don’t know what the Fed is going to do for sure, but I do stand by my prediction that there will be a rate cut before the year is out.”. “.”.

Andrea Ricci and Dan Burns edited the reporting by Howard Schneider.

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encompasses the U. s. Federal Reserve, monetary policy, and the economy. She holds degrees from the Universities of Maryland and Johns Hopkins, and she has worked as a local Washington Post staff member, an economics reporter, and a foreign correspondent in the past.

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