The Fed and politics: does the Powell Fed want to avoid Trump?
Fed Chair Jay Powell made it clear on Friday that the Fed is ready to begin cutting rates. In his speech at an annual Fed gathering in Jackson Hole, Wyoming, Powell stated that “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.” The “pace of rate cuts” is the key language, suggesting between the lines that if the incoming data is sufficiently weak, the Fed could cut by the larger 0.50%, with current odds almost 50-50 on whether the Fed will cut 0.25% or 0.50%.
Many have speculated that in this politically charged election season, the Fed wouldn’t want to start with a large rate cut as this could give the impression that it is trying to boost the Democrats’ chances in the election by ensuring financial conditions are as easy as possible. Why would the Fed want to do so? Some argue that Chair Powell detests Trump and the risks the former president could pose to the Fed’s theoretical independence from government. Powell kept very quiet back in 2018 when Trump was loudly discussing firing him for continuing to hike interest rates. In this election cycle, Trump has been very aggressive in stating that he would like direct say in Fed policy decisions.
Much more on the meaning of the Fed starting a rate cut cycle next week! For now, while the Fed would likely like to avoid a second Trump administration even if it would never say so and support the economy and financial markets any way it can without appearing political, it will have to have weak incoming data over the next three weeks that gives an excuse to cut more aggressively at the September 18 FOMC meeting.
