Fed chief caught in partisan battle over rate cuts as election looms

Interest rates are becoming an increasingly partisan issue ahead of the 2024 election as Democrats exhort the Federal Reserve to slash rates and reduce borrowing costs while Republicans sound notes of caution about inflation sticking around.

Former President Trump, who frequently pressured the politically independent Fed during his presidency to cut rates in service to his political goals, has already accused the central bank of having its finger on the scale of the election in favor of Democrats.

Lawmakers are now increasingly falling into partisan camps in arguing for or against rate cuts, with Democrats sensitive to the effects of higher rates on housing costs and Republicans wary of cutting rarely prematurely.

“My goal here is to convince you to cut more and sooner,” Rep. Brad Sherman (D-Calif.) told Fed Chair Jerome Powell during a hearing of the House Financial Services Committee on Wednesday, arguing that the Fed’s annual target rate for inflation of 2 percent is too high.

“The big issue is housing, and your measure of inflation seems to treat all Americans as renters even though two-thirds are homeowners. When interest rates go up, that’s an increase in the cost of living for anyone with an adjustable rate mortgage, anybody looking to buy a house, anybody with a home equity loan,” he said.

Housing costs, which go up when interest rates go up, were the largest factor in the January increase in “core” inflation, a metric that removes the harder-to-predict categories of food and energy and that is of greater importance to the Fed’s monetary policy than the headline number.

“Housing affordability is the number one issue I’m hearing about from my constituents. Families in my district and across the country need relief now. I truly hope the Fed will listen to them and cut interest rates,” Rep. Ayanna Pressley (D-Mass.) told Powell.

Rep. Joyce Beatty (D-Ohio) told Powell that interest rate increases and higher interest rate levels are more taxing on minority groups.

“The effects of interest rate hikes are not borne equally by all American households. We hear that. There’s no doubt that low-income and minority communities are hit the hardest by these monetary changes,” she said.

Meanwhile, Republicans are bashing at Democrats for calling for rate cuts before inflation has reached the Fed’s target rate of 2 percent, even though the central bank expects to cut rates at some point this year.

“Some Democrats have even trained fire on you, Chair Powell, blaming interest rate hikes —which were necessitated by Democrat spending — for the high costs and brazenly calling on you to make cuts prematurely,” House Financial Services Committee Chairman Patrick McHenry (R-N.C.) said Wednesday.

Other Republicans praised the Fed for sticking to its guns in combating inflation and for preserving its targets in the face of elevated price increases.

“While the rate of price increases has come down thanks to monetary tightening, the overall level of prices remains high,” Rep. Andy Barr (R-Ky.) said Wednesday. “Americans have suffered years of eroding purchasing power in their paychecks and … I’m pleased the Fed is resolved in getting inflation back under control.”

Last month, Trump said the rate could help Democrats in the election.

“I think [Powell is] going to do something to probably help the Democrats, I think, if he lowers interest rates,” he told the Fox Business television network in February. “It looks to me like he’s trying to lower interest rates for the sake of maybe getting people elected, I don’t know.”

Powell, a Republican, was first appointed to the Fed by former President Obama, elevated to chairman by Trump and renominated by President Biden. He received broad bipartisan support from the Senate for each appointment.

Powell has stuck to his message that the timing of rate cuts is not yet known, though they are expected at some point this year. The median forecast in the Fed’s December summary of economic projections is for rates to fall to 4.6 percent from their current range of 5.25 percent to 5.5 percent.

“We believe that our policy rate is likely at its peak for this tightening cycle,” Powell said Wednesday. “If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”