US rate cuts a boon for Biden in election year

She also pointed to “a much more positive view about what the economy is likely to look like over the course of the next year” in financial markets. “That is bringing down mortgage rates in a way that we also really welcome. We know housing affordability continues to be a squeeze for so many Americans,” Brainard said.

Manufacturing incentives

Since the Fed’s meeting, US government bond yields have touched multi-month lows, with the 10-year Treasury note, which serves as a global benchmark, trading below 4 per cent for the first time since August.

The prospect of the Fed shifting to lower rates will not only help potential home owners and the housing market, but could ease costs across the economy, including for business investments.

Jennifer Harris, a former Biden White House economic official, said it was vital for rates to come down for the huge manufacturing incentives enacted over the past years to be completed.

“The rest of the economy could well muddle through on ‘higher for longer’, but that is not true for the delicate set of investments that are incredibly capital intensive that we just passed historic legislation to stand up,” Harris said. She would like to see the Fed cut rates at an even faster rate than projected by its officials this week.

The trajectory of the economy is important for Biden on the cusp of an election year. The better outlook from the Fed has also chimed with a record high in the Dow Jones Industrial Average stock index, which the Biden campaign has been touting.

The vote will be in November, but perceptions of the economy are often cemented earlier in the year, and the president is trying to reverse dismally low approval ratings on his handling of the economy.

In his press conference this week, Jay Powell, the Fed chairman, said politics would not be a factor in the central bank’s thinking.

“We don’t think about political events. We don’t think about politics,” he said. “We’ll do the things that we think are right for the economy when we think [it] is the right time. That’s what we always do.”

The Fed’s turn towards essentially calling the peak in interest rates and beginning to entertain rate cuts stemmed primarily from officials’ shifting stance on the inflation outlook. According to this week’s projections, most now expect price pressures to ease more rapidly next year and in 2025 than just a couple of months previously, before reaching a level consistent with the central bank’s longstanding 2 per cent target the year after that.

At the same time, officials forecast the economy will continue to grow more than 1 per cent in 2024 and 2025, with a minimal increase in the unemployment rate to 4.1 per cent. It stands at 3.7 per cent.

But in a telling sign, Powell made clear that safeguarding the soft landing that he and other officials have been trying to engineer was also an important consideration for officials.

“We’re aware of the risk that we would hang on too long,” he said. “We know that that’s a risk, and we’re very focused on not making that mistake.”

Yelena Shulyatyeva, senior US economist at BNP Paribas, said she expected the Fed to be guided by the inflation data, which could mean it holds off until May to begin lowering borrowing costs. Over next year, she forecasts the federal funds rate to decline by 1.5 percentage points before falling below 3 per cent by the end of 2025.

“They will not hesitate to cut faster if they see a significant deterioration in economic activity,” Shulyatyeva said.

Andrew Patterson, senior international economist at Vanguard, said one risk might be if the Fed proceeds to slash interest rates before inflation was well and truly vanquished.

“If they do end up cutting pre-emptively ...  they’re risking a reacceleration in inflation and then an eventual recession as a result of that because they are going to have to hike [again],” he said.

Financial Times