By holding rates high, the Fed is hurting Biden’s re-election chances

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Democrats are growing increasingly worried that the interest-rate cuts they had been counting on to boost their party’s electoral prospects may not materialize before Americans go to the polls in November. As a result, some in the party are pressing President Joe Biden to publicly browbeat Federal Reserve chairman Jerome Powell for holding rates at a two-decade high, in an attempt to deflect blame for the high borrowing costs weighing on voters’ pocketbooks.

Unlike his Republican rival Donald Trump, who routinely criticized Mr. Powell when he was in the White House and threatened to oust the Fed chair if he wins in November, Mr. Biden has steadfastly respected the central bank’s independence and refrained from back-seat driving on monetary policy. But some Democrat strategists are urging him to drop the decorum.

“Voters at least knew Trump didn’t like it when interest rates went up,” Democratic pollster Evan Roth Smith last week told The New York Times. “He said something, he berated a guy in public – the guy who raised them – and he drew political distance between himself and that decision by laying blame at the foot of the Fed and Jerome Powell.”

High borrowing costs – more than the wars in Gaza and Ukraine or migration at the southern U.S. border – could prove Mr. Biden’s undoing. An early April poll by Mr. Roth Smith’s firm, Blueprint, found that 64 per cent of Americans are worried that Mr. Biden will “allow interest rates to stay high” if he is re-elected. Only 47 per cent said that about Mr. Trump. The poll of 1,040 registered voters had a margin of error of plus or minus 4.7 percentage points.

Despite buoyant growth, declining inflation and near-record low unemployment, barely one-third of Americans approve of Mr. Biden’s handling of the economy, according to a CNN poll released on Sunday. Worse still for Mr. Biden, two-thirds of voters said the economy was “extremely important to their vote for president,” a steep rise from 40 per cent in early 2020. The poll of 1,212 voters had a margin of error of 3.4 per cent 19 times of 20.

The Fed is expected to hold the line on its benchmark rate, which now stands at 5.3 per cent, after its Federal Open Market Committee meeting on Wednesday, as persistent inflationary pressures push rate cuts further into the future. Mr. Powell has sounded more hawkish in recent weeks amid signs that core inflation remains too far above the Fed’s 2-per-cent target.

With many analysts now predicting the Fed may not lower rates until the end of the year, if at all in 2024, the central bank’s independence is shaping up to become a key election issue as Mr. Trump’s advisers float plans to give the White House a bigger role in setting monetary policy if their candidate is successful in November – and to possibly even fire Mr. Powell.

Mr. Trump nominated Mr. Powell for the top job at the Fed in late 2017, after refusing to name then-Fed chairwoman Janet Yellen to a second term and criticizing the Fed’s moves to nudge interest rates higher on her watch. But Mr. Trump soon began to criticize his own appointee for holding rates too high – until the COVID-19 pandemic drove rates to nearly zero.

Mr. Trump has suggested he could fire Mr. Powell before the end of the Fed chair’s term in 2026 if he retakes the White House. The Wall Street Journal recently reported that the presumptive Republican nominee’s advisers have circulated proposals to rein in the Fed’s independence after the election.

Mr. Trump “appears to want someone in charge of the institution who will, in effect, treat the president as an ex officio member of the central bank’s rate-setting committee,” the newspaper reported, adding that the proposals “have alarmed some Trump advisers with more traditional views of the role of the Fed, as well as Republican lawmakers.”

Any attempt by Mr. Trump to reduce the Fed’s independence would likely face stiff resistance in Congress. While the president nominates Fed governors, and picks its chair, the Senate must confirm those nominations before they become effective. And even most GOP senators strongly support the principle of Fed independence.

Still, victory in November would likely embolden Mr. Trump to defy political norms even more than he did during his first term. He would likely seek to bend Congress (provided the GOP retakes the Senate and holds the House of Representatives) to his will even more forcibly than he did between 2017 and 2021.

For now, the Fed’s interest-rate orthodoxy is working in Mr. Trump’s favour. By holding rates higher for longer, the central bank is just doing its job. Inflation remains the biggest threat to the U.S economy and preventing a 1970s-style inflationary spiral must be the Fed’s top priority.

Still, to the extent the Fed’s stand hurts Mr. Biden’s re-election chances, it may be setting itself and the U.S. economy up for a potentially perilous future under Mr. Trump. It must not ignore the unintended consequences of higher rates.