(NEW YORK) — When the Federal Reserve recently signaled interest rate cuts next year, the stock market soared to record highs and analysts voiced sunny hopes of a “soft landing.”
Arriving less than a year before the presidential contest, the announcement raised a separate consideration: What the rate cuts could mean for President Joe Biden’s reelection bid.
Analysts who spoke to ABC News said research shows that a strong economy benefits an incumbent presidential candidate, since voters factor their financial well being into an assessment of the leader’s job performance.
But the implications of interest rate cuts are more complicated, the analysts added.
“A good economy benefits an incumbent,” Ray Fair, a professor at Yale University who oversees a model that forecasts elections based on economic conditions, told ABC News. “A bad economy goes the other way.”
“How the economy does depends in part on what the Fed does, but it depends on other things, too,” Fair added.
He declined to comment on how this dynamic could be applied to the current presidential race.
In theory, lower interest rates make borrowing less expensive for businesses and consumers, propelling companies to invest in new projects and everyday people to stretch for bigger purchases. That all should help propel economic growth and buoy consumer optimism.
In turn, a major economic surge could benefit Biden, dispelling concern about a recession and improving the livelihoods of everyday people, some analysts said.
However, the benefits of forthcoming rate cuts could prove more limited, since rate moves take hold after a period of delay that can last months, some analysts said. Further, economic growth may not yield sufficient improvement in people’s direct experience, leaving sentiment about the economy unchanged, they added.
The Biden campaign did not immediately respond to a request for comment.
By some key measures, the U.S. economy demonstrates good health: The unemployment rate hovers near a 50-year low, economic growth surged in a recent three-month period and inflation stands well below a peak last year.
Still, many voters find fault in Biden’s stewardship of the economy. Nearly two-thirds of Americans disapprove of Biden’s handling of the economy, an ABC News/Ipsos poll found in August.
The economy, therefore, poses a challenge for Biden, some analysts said, noting that the policy plans at the Fed could alleviate some of the difficulty.
Even before the Fed institutes a potential rate cut, the announcement of its plans alone has delivered economic benefits, Joseph Gagnon, fellow at the nonprofit Peterson Institute and a former senior economist at the Federal Reserve, told ABC News.
The central bank’s policy shift in recent days reduced yields on the all-important 10-year treasury bond. Lower bond yields make borrowing less costly for consumers on items big and small.
Last week, for instance, mortgage rates fell below 7% for the first time since August, Freddie Mac said in a statement.
“Bond yields fell and that actually does stimulate the economy,” Gagnon said.
The central bank’s pivot to rate cuts could also do away with a potential political liability for Biden: rate increases.
“That’s the absence of a negative political headwind for the Biden administration,” Steve Boms, founder and president of Washington, D.C.-based consulting firm Allon Advocacy, told ABC News.
The most recent Democratic presidential candidate who failed to win reelection, Jimmy Carter, lost his bid amid a historic series of rate hikes at the Fed.
Still, some analysts warned that potential rate cuts could have minimal impact on Biden’s reelection hopes, since voters already disapprove of his handling of the economy and potential improvement could prove too little or too late to change that sentiment.
The challenge stems in part from the conundrum surrounding Biden, in which strong economic measures have not translated into approval of his job, Boms said.
“One of the primary motivations, typically, of the Fed reducing rates is to bolster employment and reduce unemployment,” Boms added. “But in the current situation we’re already at historically low unemployment levels.”
Moreover, the economic benefits brought by rate cuts often arrive months after the Fed imposes the policy, Gagnon said. If the Fed begins to cut rates midway through next year, he added, the economic improvement may not manifest itself ahead of election day.
“The window is closing,” Gagnon said.
When asked about next year’s election at a press conference in Washington, D.C. on Wednesday, Fed Chair Jerome Powell said, “We don’t think about politics.”
“We’ll do the things that we think are right for the economy at what we think is the right time,” Powell added.
However, the Fed’s fight against inflation carries significant implications for the presidential election, Fair wrote in an article in February.
Over the coming months, Fair said, “the media will be dominated by stories about political candidates, debates, poll results, [and] campaign spending issues.”
He added: “But behind the scenes is what really matters, namely how successful will the Fed be?”
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