Federal Reserve officials are widely expected to embark upon a rate-cutting campaign in the coming months, bringing borrowing costs down from elevated levels as cooling inflation allows policymakers to stop squeezing the economy so much.
But they will most likely do that against a fraught political backdrop.
The Fed is expected to start cutting rates in mid-September, not long before voters in the United States head to the polls to elect a new president. Central bankers will meet about rates again on Nov. 6-7, just days after the election.
If they lower interest rates before the vote, there is a risk that Republicans will cast it as a politicized move meant to help Democrats: Lower borrowing costs can bolster the economy and markets. Former President Donald J. Trump, the Republican nominee, has already said the Fed should not be cutting rates leading up to November.
But central bankers have been clear that they plan to set interest rates with an eye on inflation and job market data, while trying to ignore the election entirely. Fed officials have been keeping interest rates high to bring inflation under control, and now that price increases have come down notably and the job market is cooling, they are slowly pivoting toward rate cuts to make sure they don’t slow the economy too much and cause a recession.
“Their actions are going to be guided by the right thing to do from the perspective of monetary policy,” said Karen Dynan, a professor at Harvard who was the chief economist at the Treasury Department during the Obama administration.
Incumbent politicians would generally prefer to have low interest rates, which can help the economy grow more strongly. President Biden has mostly avoided commenting on monetary policy out of respect for the Fed’s independence from the White House, and Jerome H. Powell, the Fed chair, recently said he had not met with the president in the past two years.
But other prominent Democrats have been publicly urging Fed officials to cut rates, arguing that the data justify an immediate move even if Republicans claim that a rate reduction would be political.
“A rate cut at your meeting this week would represent the polar opposite of a ‘political’ intervention,” Senators Elizabeth Warren of Massachusetts, John Hickenlooper of Colorado and Sheldon Whitehouse of Rhode Island wrote in a letter to Mr. Powell this week. All three are Democrats.
While Mr. Trump called for lower rates regularly when he was president, he has repeatedly suggested that any move to cut them before the election would be a politicized bid to help Democrats. In a recent interview with Bloomberg Businessweek, he called a rate reduction before the Nov. 5 election “something that they know they shouldn’t be doing.”
If Mr. Trump were to win, one big question is whether he would approach the Fed the way he did during his first term as president — regularly and loudly criticizing the central bank — or whether he would go further, potentially trying to fire Mr. Powell before his term expires. Whether a Fed chair can actually be fired is unclear.
“I would let him serve it out, especially if I thought he was doing the right thing,” Mr. Trump said in his Businessweek interview. While that suggests the former president isn’t planning to fire Mr. Powell, Mr. Trump’s wording hints that he thinks dismissing the Fed leader is a choice.
If Democrats win the White House in November, the Fed could see more continuity. Vice President Kamala Harris, the presumptive Democratic nominee, has said relatively little about inflation and monetary policy. But she was on board as vice president when the Biden administration crafted its economic policy stance.
“We’re likely to see a similar approach,” said Bharat Ramamurti, who served as the deputy director of the National Economic Council for manufacturing, innovation and domestic competitiveness from 2021 to 2023 during the Biden administration. “That would be my guess.”