Rate cuts signal shifting priorities for Fed

On Wednesday, the Federal Reserve announced its decision to cut federal interest rates by 50 basis points or 0.5 percent, reversing a two-year trend of increases since March 2022. It’s the first time the Fed has lowered interest rates in four years.

Fed Chairman Jerome Powell said the decision should inspire confidence in the country’s direction.

“Our economy is strong overall and has made significant progress towards our goals over the past two years. The labor market has cooled from its formerly overheated state,” Powell said in televised remarks on Wednesday. “This decision reflects our growing confidence that within an appropriate recalibration of our policy stance, strength in the labor market can be maintained.”

The cuts indicate a shift in the Fed’s prolonged battle against inflation—one that holds different significance for different groups. To some Democrats, the rate cut is a sign that the Biden administration has safely navigated the economic aftermath of the COVID-19 pandemic by avoiding a recession while tamping down inflation over time. To Republicans, it signals that the workforce isn’t doing as well as the president may want the public to believe.

The change will lower the amount banks are required to pay each other as they swap funds to satisfy federal requirements for how much cash they have on hand. It will also lower the amount the government pays banks for holding those reserves. The change incentivizes banks to increase their lending, eventually passing those incentives to consumers in the form of lower interest rates on car loans, mortgages, and more.

Jared Pincin, associate professor of economics at Cedarville University, explained that the Federal Reserve has two main priorities.

“The central bank has what we call the dual mandate. To maximize employment; that’s the first thing. And the second part of the dual mandate is to make sure that aggregate prices are stable,” Pincin said.

Pincin explained that today’s cuts are not a declaration of victory over inflation but rather an indication that the Fed has switched its focus to the other half of its mandate: keeping the workforce strong. The announcement doesn’t necessarily indicate a recession, but Pincin believes it means the economy is slowing. He thinks the Fed shares that concern.

“Their tone has completely shifted from inflation to employment,” Pincin said moments after the Fed’s announcement. He noted that the United States has not met recent projections for how many jobs the economy would add month over month.

Rep. Mark Alford, R-Mo., a member of the House Committee on Small Business, said the news is not as good as how Democrats are portraying it..

“I don’t think they’ve beaten anything,” Alford told WORLD when asked about whether the cuts mean the country had moved past inflation concerns. “I think they’ve had failed monetary policy from the beginning, injecting trillions of dollars into the economy, which created this inflation to begin with.”

Rep. Marc Molinaro, R-N.Y., also serves on the House Committee on Small Business. He said the rate decreases were overdue.

“The rate of inflation has slowed but the costs remain high, and that’s been really keeping businesses and small businesses under enormous pressure,” Molinaro said. “The federal government shouldn’t have spent money it didn’t have.”

He added that a 50-basis-points change would not have a dramatic effect on households, “but it begins the slow relief that was needed months ago.”

“I think the Fed is responding to the fact inflation has crippled middle-class families. And one way to begin relief for them is with rate reductions.” Molinaro said. “A 50-basis-points [change] isn’t going to change that burden, but it begins the slow relief that was needed months ago.”

He pointed out that in many ways—although inflation has come down from its 8.9 percent peak in June of 2022—the damage has already been done.

Rep. Jared Golden of Maine, a Democrat on the small business committee, doesn’t see it that way.

“I think the Fed makes their decision based upon what’s going on in the economy without any concern about the administration or about any other administration,” Golden said. “They feel that inflation is under control. It’s a good sign, but I don’t think anyone should spike the football and say the economy is great by any means.”

I asked Golden about Republican criticism that the administration contributed to inflation through expensive spending bills such as the $433 billion Inflation Reduction Act, and the $550 billion Infrastructure Investment and Jobs Act.

“Inflation was driven by many things that happened before [President Joe Biden] was in office and some things that happened after,” Golden said. “Also, by some things that are beyond the control of any president or any Congress. It was many things combined.”

Pincin pointed out that the Fed has its next scheduled meeting Nov. 6-7, just one day after the general election on Nov. 5. He believes it made sense for Chairman Powell and other members of the board to kick off rate cuts now to avoid the appearance of making a political move by changing course right after the election.

While the parties will likely try to use the Fed’s cuts to make their own cases to voters just three months removed from a presidential election, Pincin noted that both sides have a point.

“I mean, inflation is not 6, 7, 8 percent, you know—but the labor market is weakening. And so, there’s a kernel of truth of both,” Pincin said.