When the Federal Reserve recently announced interest rate cuts next year, the stock market rose to record highs and analysts expressed high hopes for a “soft landing.”
Because the announcement came less than a year before the presidential campaign, it raised a particular consideration: what the rate cuts could mean for President Joe Biden's reelection.
Analysts who spoke to ABC News said research shows a strong economy benefits an incumbent presidential candidate because voters consider their financial well-being when assessing the leader's job performance.
But the impact of rate cuts is more complicated, analysts added.
“A good economy benefits an incumbent,” Ray Fair, a Yale University professor who oversees a model that predicts elections based on economic conditions, told ABC News. “A bad economy goes the other way.”
“How the economy performs depends in part on what the Fed does, but it also depends on other things,” Fair added. He declined to comment on how that dynamic might apply to the current presidential race.
In theory, lower interest rates make borrowing cheaper for businesses and consumers, encouraging companies to invest in new projects and encouraging ordinary people to make larger purchases. All of this should help boost economic growth and boost consumer optimism.
A big economic recovery, in turn, could benefit Biden, easing concerns about a recession and improving the livelihoods of ordinary people, some analysts said.
However, the benefits of impending rate cuts may prove more limited as interest rate moves only take effect after a period of lag that could last months, some analysts say. Furthermore, economic growth may not lead to sufficient improvement in people's direct experiences, leaving sentiment towards the economy unchanged, they added.
The Biden campaign did not immediately respond to a request for comment.
The U.S. economy is in good health based on a few key metrics: the unemployment rate is near a 50-year low, economic growth has risen sharply over the past three months, and inflation is well below last year's peak.
Nevertheless, many voters criticize Biden's management 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 Fed's policy plans could partially alleviate the difficulties.
Even before the Fed initiates a potential rate cut, just announcing its plans has brought economic benefits, Joseph Gagnon, a fellow at the nonprofit Peterson Institute and a former chief economist at the Federal Reserve, told ABC News.
The central bank's policy change in recent days reduced the yield on the key 10-year Treasury note. Lower bond yields make it more cost-effective for consumers to borrow for items large and small.
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Last week, for example, mortgage rates fell below 7% for the first time since August, Freddie Mac said in a statement.
“Bond yields have come down and that’s actually stimulating the economy,” Gagnon said.
The central bank's pivot to rate cuts could also remove a potential policy liability for Biden: interest rate hikes.
“This is the absence of negative political headwinds 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 to fail to win re-election, Jimmy Carter, lost his bid amid a historic series of interest rate hikes at the Fed.
Still, some analysts warned that possible rate cuts could have minimal impact on Biden's re-election hopes because voters already disapprove of his handling of the economy and a possible improvement could prove too little or too late to change that sentiment.
The challenge is due in part to the dilemma surrounding Biden, in which strong economic measures have not led to approval of his office, Boms said.
“One of the main motivations for the Fed to cut interest rates is typically to boost employment and reduce unemployment,” Boms added. “But in the current situation we are already at a historically low level of unemployment.”
What's more, the economic benefits of rate cuts often don't materialize until months after the Fed implements the policy, Gagnon said. If the Fed begins cutting interest rates in the middle of next year, he added, the economic improvement may not be felt before Election Day.
“The window is closing,” Gagnon said.
A Reuters analysis found that rate cuts next year would deviate from the policy approach the Fed took before many recent presidential elections. Key interest rates remained unchanged for six to 12 months before the 2020, 2016, 2012 and 2000 U.S. presidential elections, the newspaper showed.
Of course, the Fed says it makes decisions based on economic conditions and acts as an independent government agency.
When asked about next year's election at a news conference in Washington DC on Wednesday, Fed Chairman Jerome Powell said: “We don't think about politics.”
“We will do the things we think are right for the economy at the right time,” Powell added.
However, the Fed's fight against inflation has significant implications for the presidential election, Fair wrote in a February article.
In the coming months, Fair said, “the media will be dominated by stories about political candidates, debates, poll results, etc.” [and] Campaign spending issues.”
He added: “But what really matters behind the scenes is, how successful is the Fed going to be?”
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