Happy Fed Day, Washington. This is the big one.
The Federal Reserve is expected to cut interest rates today for the first time since hiking them steeply in 2022 to battle inflation. And we say “expected,” but officials including Fed Chair Jay Powell have made very clear for weeks now that the time has come for cuts.
The big question now is the size of the cut, at least for economists. The field remains effectively split on the odds of a 25 or 50 basis point cut. But the consensus is now leaning toward 50 basis points as the more likely outcome.
The other thing that makes this Federal Open Market Committee meeting “the big one” is timing. This is the FOMC’s last scheduled meeting before the general election on Nov. 5. And while there was plenty of griping in the months leading up to today about the political risks of cutting rates on the verge of an election, heads have mostly cooled off here on Capitol Hill.
Virtually every lawmaker we’ve interviewed during the last two weeks has said that the Fed’s decision to cut rates today won’t reshape the election, probably. Inflation has been on the back foot for a while, and lowering rates is an acknowledgement of that success.
“I think the election is mostly baked in for the overwhelming majority of people,” said Sen. Mitt Romney (R-Utah). “The economy is doing well at this stage, and I don’t see any indication that there’ll be some abrupt change.”
There will be sectors of the U.S. economy that feel the impact of lower rates first. Housing is at the top of the stack. Lower interest rates could jumpstart home sales and give early-to-mid career workers an affordable shot at homeownership. It won’t be immediate, however.
Progressives like Sens. Sherrod Brown (D-Ohio) and Elizabeth Warren (D-Mass.) have argued the Fed may be contributing to inflation with higher rates, as the cost of shelter has been inflation’s main driver for many months now. “Nobody’s building new [homes], and nobody can afford to buy one,” Warren told us Tuesday night.
This is an area where many Republicans agree, at least in theory. “There’s a certain segment of young adults between the ages of 25 and 35 who have done everything they should do, including saving for a down payment, and they just simply can’t break into the housing market,” Rep. Scott Fitzgerald (R-Wis.) said. Fitzgerald added that today’s cut could be a “light at the end of the tunnel” for would-be homeowners.
Many lawmakers aren’t all that stressed about the size of a cut, and plenty deferred judgment when asked. “Whether they go with 25 basis points or 50, it shows the direction that the economy is going,” Rep. Madeleine Dean (D-Pa.) said. “Which is, it’s going in the right direction.”
Then again, others made the point that a bigger cut could suggest economic angst at the Fed, which could spill onto Wall Street. Fitzgerald said a 50 basis point could “absolutely signal that either the Fed sees something the rest of us aren’t seeing, or the predictions from pundits that we are on our way to a recession could be real.”
At the end of the day, the Fed isn’t making this decision in a political vacuum. Plenty of Democrats are optimistic that a rate cut would help Americans feel better about the economy in the short term.
“I hope it sends a signal to the electorate — do you want to lose this pace of progress?” Dean said.
— Brendan Pedersen and John Bresnahan
