What Fed’s robust rate cut means for US presidential election

In a widely anticipated move, the Federal Reserve announced on September 18, 2024, that it was cutting its benchmark interest rate by half a percentage point to a range of 4.75% to 5% – the first time the cost of borrowing has been lowered in four years.

The move marks an important pivot point, signaling that central bankers believe they have finally won their battle against inflation. It is also significant in timing, coming just months before the US heads to the polls in a tight election that could turn on how Americans feel the economy is going.

Mike Walden, distinguished professor emeritus at North Carolina State University, speaks here about what the rate cut means for the US economy – and possibly the presidential campaign.

What does the Fed rate cut suggest about the state of the economy?

The Federal Reserve has two mandates: to pin inflation to around its target of 2% and to keep unemployment low. And the central bank balances that twin mandate when looking at whether to raise or lower base rates, or keep them the same.

For some time now, policymakers have concentrated on trying to get inflation under control through a series of interest rate hikes that took the Fed’s benchmark or base rate from a range of 0% to 0.25% in early 2022 to 5.25% to 5.5% in September 2024.

I believe what motivated them to drop the rate by a half-point now – rather than the quarter-point that some were expecting – is the labor market. The labor market is not exactly shaky – unemployment is currently at 4.2% – but it isn’t as robust as it was.

The latest job numbers were a little below expectations. And some economists are saying that there is a recession ahead. Indeed, there are some that are saying the US is already in a recession.

So