Breakingviews: Jay Powell gives next US president an early boost

Jerome Powell has given the next occupant of the White House an early boost. The Federal Reserve chair’s double-sized rate cut on Wednesday shows the central bank has shifted from battling rising prices to the second part of its dual mandate: the pursuit of full employment. The Fed’s actions come with a lag, meaning the expected increase in home sales, stock purchases, and capital investment will probably only kick in following November’s U.S. presidential election. But whoever wins has a better chance of inheriting a soft landing.

The Fed’s long-term projections are the closest the central bank is likely to come to formally declaring victory. They project low inflation and low unemployment for the next several years as the pandemic’s disruptions fade further into the past. The risk of a recession is minimal and gross domestic product will grow at around 2% a year. The central bankers also penciled in, on average, two more quarter-point cuts to interest rates this year, followed by reductions amounting to a full percentage point in 2025.

Powell made clear that these are not crisis moves, when the Fed acts fast to stem a rapid slowdown that’s already visible in the data. Rather, he committed to not allow high interest rates to suffocate an otherwise healthy economy which faces few inflation risks.

For now, the U.S. economy is still showing signs of weakness. Lower-income consumers are struggling with the price increases of recent years, adding credit card debt, and spending far too much of their take-home pay on housing. Slightly lower borrowing costs will not help them much. But the housing market should see a boost in construction and transaction activity as lower mortgage rates help first-time home buyers.

Equity markets, meanwhile, should benefit as investors shift some of the $6.5 trillion parked in money market funds into riskier investments. That’s the virtuous cycle of lower interest rates: looser financial conditions beget even looser financial conditions.

Even the political fallout of announcing a large cut in interest rates less than two months before the election seems muted. Republican complaints that the Fed’s action is a form of interference make little sense, and even those making the argument do not seem to fully believe it. The speaker of the House of Representatives, Mike Johnson, called the Fed’s timing “curious” but also noted that it would help consumers. In any event, the delayed effects of lower interest rates will ensure that the primary benefits will be felt by the next president, be it Kamala Harris or Donald Trump.