Biden administration gets boost from Fed rate cut

The Biden administration is touting its confidence in the economy after a Federal Reserve interest rate cut spurred a stock market rally.

Markets popped last week after the Fed cut interest rates for the first time in more than four years, ushering in a new phase for the economy that has Democrats praising their record and Republicans sounding alarms about the risk of a downturn.

Major stock indices, including the S&P 500 and the Russell 2000, gained about 1 percent following Wednesday’s rate cut, with the Dow Jones Industrial Average jumping more than 1.3 percent through the end of the week.

“After a quiet two weeks, inflows into equity funds surged higher again with $51 billion flowing in since last Wednesday, most of it in the last 3 days. This is the largest weekly inflow in 2 months and continues the strong trend in place since late April,” Deutsche Bank analysts Parag Thatte, Binky Chadha and others wrote in a Friday analysis.

They said the more than $300 billion that has entered equity markets since April “seems large but is quite typical of upcycles,” noting they saw room for inflows to continue.

Treasury Secretary Janet Yellen seized the moment over the weekend to tout her administration’s successes and praise the state of the economy.

“I believe that Americans can feel optimistic about their economic futures,” she wrote in a Sunday opinion piece for The Wall Street Journal, qualifying that the cost of living was still too high for many Americans.

“The U.S. has outperformed many other advanced economies, with greater real gross domestic product growth and a faster decline in inflation while maintaining a strong labor market,” she observed.

Markets tend to respond positively to Fed rate cuts because they make the costs of financing cheaper and promote private sector investment. But they can also signal the beginning of a downturn in the business cycle.

Recessions have started after rate cutting cycles in 2020, 2007 and 2001, though the correlation becomes a bit fuzzier in earlier cycles.

However, multiple economists told The Hill the U.S. economy is not close to a recession. Despite some upward movements in the unemployment rate, the pace of job creation is still elevated relative to historical levels. While the number of jobs being added to the economy appears to be tapering in the data, it is not decelerating.

“We’re close to a neutral position,” Harvard Kennedy School economist Jeffrey Frankel said in an interview. “The danger of recession is not especially high … I don’t see any real signs of it. Reports say that employment has been slowing, but even now the rate of job creation is greater than it usually is. On average, it’s greater than necessary to keep up with population, so I think that’s pretty healthy.”

Chicago Federal Reserve President Austan Goolsbee gave a similarly positive assessment of the economy while acknowledging there “were some warning signs” as the jobless rate ticked up to 4.2 percent.

“That’s where you want to stop,” Goolsbee said during a Monday event with state treasurers.

“[If] inflation is basically close to where you want it and unemployment is close to where you want it, would you think that it makes sense to have the interest rate be at 20-year highs?” he said.

“No, you’d be nervous. You’d be like, ‘If rates are this high, we’re not going to stay at that freeze-frame moment for that long.’”

The Fed’s long-awaited rate cut came less than two months before the election and amid a battle between Vice President Harris and former President Trump to win voter confidence on the economy.

Democrats have been eager for more positive news about the economy and the stimulative effect of rate cuts after years of high inflation weighing on their approval ratings.

Republicans, on the other hand, are hoping to ride voter frustration with inflation to success I November.

Positive sentiments from policymakers about the state of the economy are not shared by Trump, who described conditions as “terrible” over the weekend in an interview with the Fox News television network.

Trump also continued to suggest the Fed, officially an independent agency of monetary policy, may be playing politics with its rate cuts. “You could make the case for them, or it's politics, or maybe it's a combination of both. But the economy is bad,” he said.

Trump broke with precedent in frequently criticizing Fed Chair Jerome Powell in public during his presidency, and his political allies have even floated plans to limit the agency’s independence, according to a Wall Street Journal exclusive from April.

Trump’s sensitivity to the political power of rate cuts was on display over the summer, when he warned central bankers against dropping them too soon ahead of the November election.

“Interest rates are very high now and it’s hard for them. I know they want to try and do it. Maybe they will do it prior to the election, prior to November 5, even though it’s something that they know they shouldn’t be doing,” he said during an interview with Bloomberg News.

Whether the strong performance of the economy over the postpandemic period as seen through other top-line metrics, like gross domestic product and employment levels, translated through the capital and investment structure to the bulk of American households — and especially those in swing states that will have an outsized bearing on the outcome of the election — is a much more difficult question to answer objectively.

Following the postpandemic inflation surge, which was bolstered in different sectors by profit margin expansion, labor activity in the U.S. popped off last summer in what was informally termed the “summer of strikes.” Influential labor unions from Hollywood to the health care industry engaged in various labor actions, with momentum continuing to have an effect on the economy.

While employment is still low in absolute terms, the relative looseness in employment conditions that allowed workers to change jobs with ease and bid up their wages has all but gone away as the ratio of available private-sector jobs to job seekers now favors employers.

Personal savings, after soaring due to stimulus checks sent out by both the Trump and Biden administrations, have been depleted, and credit card debt along with other revolving loans have reached the prepandemic trend line. One recent study found a record-high rent burden for Americans, with 22.4 million renter households spending more than 30 percent of their income on utilities and rent.

On the other hand, wages for nonmanagers are up 26 percent since February, while the headline consumer price index is up just 21 percent, suggesting many people may effectively have more purchasing power, based on their take-home pay.

Median household income jumped to $80,610 in 2023, according to recent Census Bureau data, constituting a 4 percent increase from 2022 that represented the first statistically significant annual increase in that measurement since 2019.

While the Chicago Fed’s Goolsbee said Monday he expects “many more” rate cuts ahead, some market commentators believe the Fed’s easing cycle will be relatively mild compared to other cycles.

“The scale of the US Federal Reserve’s interest rate cuts in this monetary policy-easing cycle is still likely to be modest in comparison with historical rate-cutting episodes, despite the larger-than-expected cut at last week’s … meeting,” Fitch Ratings said in a statement.