If the U.S. presidential race can be likened to a regatta, Vice President Kamala Harris’ sailboat just caught an extra gust of wind.
It comes courtesy of the nation’s central bank. On Wednesday, for the first time in four years, the Federal Reserve lowered interest rates, promising to make it a little cheaper for Americans to borrow money to buy a car, finance some home loans, or start a business. Combined with other signs of a brightening economy, the Fed’s half-point move could spell the difference in a very close race for the White House.
Why We Wrote This
The state of the economy influences elections. Will voters look backward to inflation under President Joe Biden or forward to hopes of finding tamer prices and avoiding a recession?
The Fed says its rate cut and timing have nothing to do with politics or the election. But will voters look forward, and credit Ms. Harris with how inflation has improved this year? Or will they look backward to compare the economic records of Presidents Donald Trump and Joe Biden?
Voters do both. And both administrations have had mixed results on economic policy.
One of the paradoxes of this election year is that the economic data has so far proved more upbeat than consumer sentiments.
“There’s a lag,” says Michael Lewis-Beck, a University of Iowa professor who studies economic perceptions’ impact on voting. “It takes time for the numbers to sink in.”
If the U.S. presidential race can be likened to a regatta, Vice President Kamala Harris’ sailboat just caught an extra gust of wind.
It comes courtesy of the nation’s central bank. On Wednesday, for the first time in four years, the Federal Reserve lowered interest rates, promising to make it a little cheaper for Americans to borrow money to buy a car, finance some home loans, or start a business. Combined with other signs of a brightening economy, the Fed’s half-point move could spell the difference in a very close race for the White House.
Low gasoline prices, falling mortgage rates, and the rise in incomes even after adjusting for inflation suggest an Election Day win by Vice President Harris “by an eyelash,” forecasts Mark Zandi, chief economist of Moody’s Analytics, whose firm has been tracking the economies of swing states to predict the election. But economic conditions can shift suddenly before November, he warns. “These winds are very, very thin – again, a few thousand, tens of thousands of votes” in each of those key states.
Why We Wrote This
The state of the economy influences elections. Will voters look backward to inflation under President Joe Biden or forward to hopes of finding tamer prices and avoiding a recession?
The half-point rate cut comes as something of a surprise. Stock markets shot up immediately. As an independent entity, the Federal Reserve tends to move incrementally with quarter-point moves, and it has repeatedly stressed that its moves to keep the economy from growing too fast or too slow have nothing to do with politics or the election. It has made even bigger rate cuts in election years, most notably in October 2008 as the financial crisis deepened, and then again in March 2020 when the pandemic triggered a sharp recession.
But Wednesday’s move comes without an obvious economic emergency. Fed Chair Jerome Powell defended the move at a press conference, saying that as the risks of inflation have lessened, the risks of a slower economy and higher unemployment have risen.
“The upside risks to inflation have diminished and the downside risks to employment have increased,” Mr. Powell said.
Small changes in financial conditions matter because voters have consistently tagged the economy as their top concern. And while most voters long ago made up their minds, a sliver of the electorate has yet to make a choice. Their perception of the economy could seal the election.
Will voters look forward or backward on inflation?
A key question is, Will voters look forward, essentially, and credit Ms. Harris with how inflation has improved this year? Or will they look backward to compare the economic records of Presidents Donald Trump and Joe Biden?
Voters do both, of course, says Michael Lewis-Beck, a professor of political science at the University of Iowa who has studied economic perceptions and their impact on voting. But mostly they look backward, especially at what’s happened during the 12-month run-up to Election Day. And this is crunch time, because the period after the conventions is when many voters focus on the election and their views on the economy solidify, he adds.
One of the ironies is that voters tend to judge a president on things over which they have little control. Take gasoline prices, the most important determinant in voter perceptions of the economy, says Mr. Zandi. If gas costs $4 a gallon, Mr. Trump wins; if it’s closer to $3 a gallon, Ms. Harris wins. Nationally, gas prices sit at an average of $3.20 and look to be headed lower.
Presidents have almost no sway over gas prices. Even a release from the nation’s strategic oil reserve could be swamped at any time by a decision by OPEC.
The second most important factor for voters – mortgage rates – is influenced by the Federal Reserve, not the White House. But that influence can be indirect. In anticipation of a rate cut, mortgage rates have already fallen more than a percentage point since May, making it cheaper to borrow to buy a house.
Both candidates have mixed economic records
This election year is unusual because voters can compare the economic records of both candidates. And any objective look suggests mixed success. Mr. Biden and, by extension, Ms. Harris win on jobs and economic growth. But American households saw much lower inflation under Mr. Trump. And inflation-adjusted household income – voters’ third most important metric, according to Mr. Zandi – grew by about 4% under Mr. Trump before the pandemic. Under Biden-Harris, it only recently turned positive and has grown less than 1%.
The pandemic, however, complicates comparisons. Mr. Trump’s jobs record would look far less paltry if the pandemic hadn’t triggered a recession in the last year of his administration. Inflation, which reached four-decade highs under Biden-Harris, would have proved far tamer had Presidents Trump and Biden not pushed through trillion-dollar stimulus packages to stave off that pandemic-era recession.
Even signature economic achievements of both former President Trump and President Biden have met with mixed success. Mr. Trump’s 2017 tax cut package helped increase income for some 80% of households, even for many of those that don’t pay federal taxes, points out Kyle Pomerleau, a senior fellow at the American Enterprise Institute, a Washington think tank.
But the biggest benefits went to rich people, who were helped not only by the fall in individual rates but also by the big reduction of the corporate tax rate, which benefited company owners and stockholders, he adds.
Tax cuts, tax incentives, and missed opportunities
While the cuts provided a short-term boost to the economy, they added $1 trillion or more to the federal debt, says Robert Bixby, executive director of The Concord Coalition, a nonpartisan organization that encourages federal fiscal responsibility.
Evan Vucci/AP/File
By contrast, Mr. Biden’s 2022 Inflation Reduction Act – which among other things gave tax incentives to green energy projects, allowed Medicare to negotiate drug prices, and modernized the IRS – was designed not to add to the overall federal debt. But the benefits of its pro-growth investments have been offset somewhat by anti-growth tax increases, Mr Pomerleau says, which makes its long-term economic impact ambiguous.
Also, both presidents’ policies included wasteful excesses and didn’t take advantage of opportunities to use federal funds more efficiently, says Clifford Winston, a senior fellow at the Brookings Institution, a Washington think tank.
Polls give Harris an edge on economy
Until recently, more Americans trusted Mr. Trump than the current administration with the economy. In May, an Ipsos/ABC News poll found the Republican front-runner had a 14-point advantage over President Biden (46% to 32%).
But some polls suggest that in recent weeks, the Democrats’ nominee, Vice President Harris, has neutralized that advantage. A Financial Times/University of Michigan poll released Friday reported she had a slim advantage over the former president on the economy: 44% to 42%.
Similarly, polling firm Redfield & Wilton Strategies found that after trailing Mr. Trump on the economy by 6 percentage points or more in nine swing states in July, Ms. Harris now leads by slim margins in three of those states and is tied in two others.
One of the apparent paradoxes of this election year is that the economic data has so far proved more upbeat than consumers.
“There’s a lag,” says Professor Lewis-Beck at the University of Iowa. When “the growth rate comes out and the unemployment rate comes out, people don’t immediately get up in the morning and say, ‘Hey, the number went up!’”
He adds, “It takes time for the numbers to sink in.”