"The recent data have clearly not given us greater confidence and instead indicate that it's likely to take longer than expected to achieve that confidence," Powell told a forum in Washington. Powell seems to maintain that the interest rate increases need time to act, and that until they do, it's unwise to make any confident declarations about when the interest rate cut-backs will come.
As many of us learned in class recently, in mid 2022 to early 2023, the Federal Reserve Chair Jerome Powell proposed hiking interest rates, with the Republican party backing him and consequently pressuring the U.S. Federal Reserve to do so. The cause of this proposition was the growing trend of inflation (caused by excessive federal government spending and the 2021 COVID-relief stimulus checks), and many Americans were concerned that this would cause unemployment rates to skyrocket. And even though these interest rate hikes catalyzed the "soft landing" that led to high praises of the Federal Reserve and Jerome Powell for their decision-making and recession prevention, the threat of these increases continuing into 2024 prompted a swift Democratic backlash.
Early this year, Democratic senators Elizabeth Warren, John Hickenlooper, Jacky Rosen, and Sheldon Whitehouse penned a letter to Fed Chair Powell imploring him to cease the interest rate hikes, as they had resulted in higher costs for homebuyers and renters. According to the Democrats, the rate increases had sparked a cataclysmic event in the housing market and tanked housing affordability, which majority of lower to middle class Americans did not want on the 2024 Bingo Card. Though they acknowledged that Powell vowed to keep the rates steady for the foreseeable future, they still maintained that rate cuts are a necessity and need to come as soon as possible, as the effects of the interest rate hikes are being felt tremendously by the American public.
Like many of the issues plaguing our country, however, this issue isn't entirely a question of the betterment of the American people, but rather the potential political issue it may present for the highly anticipated 2024 election for Democrats. Democrats fear that the event of a continued bout of rate increases would harm a Biden reelection. As ABC News states, the most recent Democratic presidential candidate to lose the presidential nomination when it came time for his reelection was Jimmy Carter, and he lost the presidency because of rate hikes at the Federal Reserve. For Democrats, now is not the ideal time for economic unrest, and the interest rate cuts could not possibly come sooner. The interest rate cuts would further decrease unemployment rates, and these economic improvements could be instrumental to Biden retaining his presidency.
Naturally, this means that it is in the best interest of the Republican party to make sure that these rate cuts do not happen before election day. Hence, former President Donald Trump, who is currently undergoing a felony fraud court case, took Powell to case in a Fox Business Network interview, calling him “political” for entertaining the idea of rate cuts, which he believes would advocate for a Biden presidency in the 2024 to 2028 term. For context, Powell was first nominated to be Fed chair by Donald Trump in 2017, but has fallen out of grace with him for being too independent of politics; Trump vows that if he is elected president once again, he will replace Powell when his term as chair ends in 2026. Powell maintains that “this independence both enables and requires us to make our monetary policy decisions without consideration of short-term political matters,” so it appears as though he (for the moment) won't be cowed into submission by Trump or the supportive sector of the Republican party.
For now it remains to be seen what will become of the promised rate cuts and what they will mean for the 2024 election, but they are certain to make for a flamboyant declaration of economic policy, regardless of who wins the presidency.
Sources:
https://abcnews.go.com/Business/interest-rate-cuts-2024-election/story?id=105752108
https://abcnews.go.com/Business/interest-rate-cuts-2024-election/story?id=105752108
https://www.reuters.com/markets/us/feds-powell-jefferson-square-restrictive-policy-with-strong-data-2024-04-16/
https://thehill.com/business/4435570-democratic-senators-call-on-fed-to-cut-interest-rates-over-high-housing-costs/
https://thehill.com/business/4513519-fed-chief-caught-in-partisan-battle-over-rate-cuts-as-election-looms/
https://apnews.com/article/federal-reserve-powell-inflation-economy-rates-jobs-f9c65fb1b8116168f825657bc5f5c117
https://www.wsj.com/economy/central-banking/powell-dials-back-expectations-on-rate-cuts-00e3e5d0
https://www.investopedia.com/us-economy-news-today-housing-starts-and-permits-nosedived-in-march-8634124
18 comments:
I find it very interesting how the deviation of interest themselves from Powell has become largely a political rather than economic fiasco here in 2024, and serves as a good example of how polarized our nation is becoming, as although this is likely a political moved as you pointed out (Powell has clear motivation to keep Trump out of office,) it seems as if Americans will only be served the political rather than the economic factors when hearing about this change. The reality is that rate cuts are likely a necessity, but the timing seems to be very intentional from Powell as the economy seems to ALWAYS be an indicator of an upcoming presidential election as have we learned from both Gov and Econ these past few months.
Obviously, the status of the economy is MASSIVE for the 2024 Election. If Biden can claim historically low rates of unemployment AND boast that he defeated the inflation/possible recession in 2022, his chances for reelection would be fantastic. I completely agree with Luke, as this seems to have become a very political issue. It's truly disappointing, as there are many people whose lives could be changed if interest rates were lowered. The housing market is horrific right now, and if interest rates were lowered, so many opportunities would open up over time. I don't think it's much of a conspiracy to say that there might be some corruption going on, or at least some slight partisan leanings interfering with good economic policy.
I agree that the Democrats most likely have political considerations in mind when opposing rate hikes, especially as we get closer and closer to the election. I also think that rate hikes would reflect pretty badly on Biden, since, although the economy hasn't actually been doing badly (a lot of things, aside from some highly visible factors like rising prices, have actually gone well), general perception has been that the economy has done badly during his term and it is one of the weak points of his campaign in my opinion. I also think it's a funny move on Trump's part to threaten Powell since, as of now, he holds a lot of power (and will almost certainly not do things in Trump's favor with those threats), and I agree that it is for the best to keep politics out of economic policy, although this probably isn't the most realistic, as we've learned in class about normative economics and the values that are inevitably incorporated in economic policy.
I think it is strange that the Federal Reserve is still so stubborn about continuing to raise or maintain interest rates to combat the current inflation problem. Some of the articles we read in class made pretty convincing articles that inflation was not the result of excessive demand (which raising interest rates affects) but likely other problems such as supply chain issues, and that raising interest rates may not affect demand anyways (or at least demand from wealthy households). On the other hand, as you mentioned, high interest rates are very harmful to middle and working class families, especially in regards to housing being much more expensive. As such, I feel a little bit of doubt about Powell saying he is completely independent and that he is not considering politics when making decisions, considering he has been a Republican his entire life and that high interest rates may be doing much more harm than good. Of course, the federal reserve could also just be trying to play it safe, so who knows.
It's unfortunate that we're still not there yet. As Kostas mentioned, the role of the Federal Reserve itself is always up for debate. Is such a heavy-handed actor in the economy an unnecessary infringement on the free market? Or is the Fed instead a warden necessary for the economy to function smoothly? I don't think Powell is political but he and the Fed may very well have an inflated sense of their own ability to handle this problem and may feel the need to do SOMETHING, ANYTHING to show that the Fed is working on the problem instead of leaving the free market to its own devices.
Tangent: At any rate, I don't feel like we can blame the housing crisis (an example many often use to illustrate the negative effects of high interest rates) solely on interest rates, since the most extreme contributor to rising home prices is the lack of new homes being built
In class it was mentioned that the Federal Reserve was trying to trigger a recession on purpose in order to decrease inflation. This is the prime reason why interest rates have been rising steadily. What is interesting is that despite these high interest rates, people are still spending in record numbers. Although the effect of decreasing inflation in some markets is as a result of the interest rates hike, I do agree that due to 2024 being an election year, it has now become more politicized than ever before. There is no doubt that the state of the economy is directly tied to the likelihood of re-election campaigns. A part of the reason why George HW Bush wasn't re-elected is tied to the unemployment rate during his term.
It’s really interesting to see how the changes in interest rates in 2024 have turned into more of a political drama than an economic debate. This shift highlights how divided our country is becoming. Like you mentioned, Powell probably has political reasons for his decisions, especially if it’s about keeping Trump from winning again. This means that most of the time, we're only getting the political side of the story instead of understanding the economic basics behind these changes. Even though lowering the rates might actually be needed, the timing of Powell's decision feels a bit too calculated, especially with a presidential election on the horizon. It feels like economic strategies are often to be timed with elections in mind
Powell isn't sure when or if these cuts will happen, highlighting the complexities of how to balance things like inflation and economic stability. Democrats want these cuts to help people and maybe boost President Biden's chances for reelection in 2024. But Republicans, like former President Trump, are worried these moves might have a political agenda. Powell says the Fed makes decisions based on what's best for the economy, not politics. Whatever happens, it's clear that what the Fed decides about interest rates will be a big deal in the 2024 election and affect how people see the economy.
While a lot of discussion in the comments has been related to the political influences relating to this decision, I think the economic implications are just as, if not more significant.
While some claim that the interest rate hikes that occurred over the last several years have caused home price increases, they have actually had more of a freezing effect on home prices. Looking at historical home prices, there was a sharp increase in home prices from Q2 2020 until mid-late 2022. This period was when interest rates were at their lowest until they started being increased in the latter half of 2022. It's also important to note that typically central banks have used higher interest rates to bring down home prices, not raise them, as money is more expensive, decreasing demand for houses. There are a couple of reasons as to why this latest round of rate hikes hasn't quite driven down prices as much as many would expect. Firstly, there has been a huge housing deficit that has been steadily growing since the 2008 mortgage after new home construction rates crashed. Since 2008, there has been severe underbuilding of new homes as the increase in demand has far exceeded the increase in supply due to population growth and new household formation. Due to this huge deficit that has been slowly accumulating, when rates were increased this time, even though demand decreased as buying became more expensive, supply was so low that it had little effect on price. The second primary reason why housing prices are not coming down as fast as many expected has to do with the speed at which the Fed increased rates. Many people bought new homes or refinanced their homes during the peak of the pandemic, locking in extremely low-interest rates, and thus, low monthly payments. With so many people having obtained low monthly payments so recently, even though they could sell their house now at the peak of house values, most people have chosen not to due to not wanting to give up the once-in-a-generation monthly payments they got so recently, resulting in supply not changing too much. Home prices have started to decrease over the last 2 years, and lowering rates now would cause home prices to start to increase again, as mortgages become more accessible to people. The best and arguably only solution to housing prices is to build more homes, as higher interest rates have failed to bring down prices enough, and lowering interest rates would only drive prices up.
Lowering rates would also have implications on the broader market, especially on consumer goods. Most voters care pretty much only about their bottom line, and lowering interest rates would not help them. Lowering interest rates is great for businesses and the wealthiest in America, but the average middle to lower-middle-class American does not benefit that much from higher stock prices. Higher interest rates have helped slow inflation, which affects these people much more than stock prices. The Fed ideally aims for YoY inflation to remain between 1-2%, but inflation has continued to hover around 3.5%, even with high-interest rates. Prices of basic goods have already increased a significant amount from 2021-2023, and still continue to increase more than ideal. Lowering interest rates, while great for the stock market, would cause inflation to increase once more, making the price of necessary goods for Americans begin to balloon once again, even though average Americans have been stretched thin and continue to be feeling the pressure of increasing prices.
Ultimately, lowering rates will not only cause housing prices to start increasing once again but will also increase the cost of living for Americans, thus affecting their bottom line. While Powell is currently under pressure from Democrats to lower interest rates to make broader economic numbers look better in the short term leading up to the election, I believe it is ultimately the right decision for the long-term well-being of the American economy and people to not lower rates yet.
It's definitely sad to see the extent of polarization in every aspect of politics, even in economic policy. Ironically, in this instance, Republicans are advocating for increased interest rate hikes (more government intervention) while Democrats are advocating for rate cuts and thus decreased interference in the market from the Federal Reserve (less government intervention. Still, party loyalty has taken precedence over actual political beliefs, especially with an election coming up.
The pros of cutting interest rates include making borrowing cheaper, which can encourage increased spending and investment by businesses and consumers. This can help promote economic activity. If the Federal Reserve decides to lower interest rates, it could alleviate political tension, as Democrats are pressuring for a rate cut. Federal Reserve Chair Jerome Powell is hesitant because he is unsure whether the recent increases in interest rates have successfully slowed down inflation. If the interest rate is cut immediately, it might appear as yielding to political pressure, perceived as being done to improve electoral prospects rather than based on sound economic rationale.
The recent shift in Jerome Powell's stance on interest rates and the potential for rate cuts adds an intriguing dimension to both economic policy and the upcoming 2024 election. Powell's hesitation reflects the complex interplay between economic considerations and political pressures. Democrats push for rate cuts to alleviate financial burdens and potentially boost Biden's reelection chances, while Republicans express concerns over political implications. Powell's commitment to Fed independence faces scrutiny amid criticisms from figures like Trump. As the debate unfolds, it will be interesting to see how these dynamics shape economic policy and the electoral landscape.
In addition to the US economy being at stake due to the interest rate cuts, there will also be a lot at stake politically. For example, in the post, Mikaela mentioned that the Republican party backed up Powell while the Democrats gave them backlash. Moreover, the Republicans are wary of anything that could increase Biden's chances of reelection for the next term, leading to increased political polarization. Ultimately, I am curious to see how this will play out in the upcoming 2024 elections.
A rate cut would result in a more lenient borrowing environment, allowing small businesses to take out more loans and investment funds to have increased leverage. Additionally this would help the real estate sector as mortgage rates would be lower, likely resulting in more homebuyers. This comes at the cost of inflation reduction, which Poewell and others have addressed through the high rates. While addressing inflation is extremely important, rates that are to high discourage new businesses from starting and limit investment due to the high cost of borrowing. While I dont think a complete drop in rates would be helpful, decreasing the rate gradually could be beneficial for the economey.
The conservatives (like Powell, as he identifies as Republican) are interested in hiking interest rates to tighten inflation, which would slow economic activity and reduce spending, which makes sense. However the tension lies in the fact that they don’t seem to be as concerned by how the lower class will be affected by this, primarily regarding the concern of housing. Housing has been incredibly expensive in recent years, and concerns for the lower class should be addressed, yet even caring for the lower class has become political. The state of the economy and how to address the economy has become very political, as certain parties have identified certain financial positions in the past, creating a mold for more liberal and conservative economic policy. As examined by the article, the outcome of rate hikes has political implications for the Biden Administration, as people judge presidential performances based on the state of the economy. It would be ideal for our government to make economic decisions in the best interest of the citizens, instead of allowing factors like the economy to be weaponized to the favor of presidential candidate’s images.
To draw upon the ideas that Ethan mentioned earlier, regarding the economic effects of interest rate changes, especially with regard to house values, I concur with the concerns made. The examination of how interest rates have affected house prices is accurate, particularly in light of the housing shortage that has existed since 2008. In fact, one of the reasons why rate hikes haven't significantly lowered home prices recently is the lack of new construction and homeowners' unwillingness to sell because of their low mortgage rates.
From a different angle, I believe it's also critical to think about how these interest rate changes may affect the rental market. Due to rising interest rates, fewer people can now afford to buy homes, which has increased demand for rentals and raised rental prices. For individuals who are already unable to access the homeownership market, this adds to their financial burden. Thus, even if keeping interest rates high could keep inflation under control and stabilize home prices, it could unintentionally worsen problems in the rental market, so policymakers must take a comprehensive approach to addressing housing affordability.
Furthermore, while higher interest rates contribute to reducing inflation, they also make borrowing more expensive for businesses, which can impede the expansion of the economy and the creation of jobs. It's a difficult undertaking to strike a balance between the need to keep inflation under control and the possible harm to employment and wage growth. To lessen some of these negative consequences, policymakers should take into account complementing policies like incentives for home construction and focused assistance for low-income renters.
One problem less talked about in this story is the politicization of the economy, with so many swing state voters, voting retrospectively upon the economy's performance, parties have become increasingly focused on the limited economic control the government has, and allowing it to serve their party. While it is a sound political strategy, it is most certainly not in the interest of the common person, who, if the fed becomes as political as a lot of the rest of American politics, will be subject to economic shifts depending on whether the fed and the incumbent party are the same or different. While Jerome Powell certainly makes an effort to avoid this, maintaining interest rates as they are, it certainly is not forgotten that he was appointed by Trump, and it may have been that despite economic indicators being good enough to lower rates, he didn't, simply to avoid helping the democrats.
On paper, the Fed is supposed to operate independently of political pressure / influence, and for good reason. And yet, both Democrats and Republicans in Congress are pressuring the Fed to do certain things in order to influence the upcoming presidential election. I found it a bit funny how Powell was nominated by Trump, and then Trump started to dislike him because he was operating too independent of politics, which is kind of the whole point / what you're supposed to do as Fed Chairman.
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