Why the Federal Reserve interest rate cut hurts Democrats in 2020

Why the Federal Reserve interest rate cut hurts Democrats in 2020
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The Federal Reserve has lowered interest rates this week for the first time since the Great Recession. In his testimony earlier this month, Federal Reserve Chairman Jerome Powell all but promised to lower interest rates. Some Democrats on the House Financial Services Committee applauded the sentiment but, as a matter of fact, this move would only exacerbate inequality and simply improve the reelection odds of President TrumpDonald John TrumpSarah Huckabee Sanders becomes Fox News contributor The US-Iranian scuffle over a ship is a sideshow to events in the Gulf South Korea: US, North Korea to resume nuclear talks 'soon' MORE.

The move, which is a reversal of monetary policy course after the last rate hike in December, would follow 121 straight months of economic growth. With sustained low unemployment and a record strong stock market, an interest rate cut implies that conditions have worsened significantly since December. Federal Reserve policy has in the last decade been a response to the crisis with low interest rates during the recovery, largely reflecting the economic consensus with the exception of a few inflation alarmists.

Debate flourished on when the policy should end. That debate today is closed as the Federal Reserve has moved toward a steady normalization of rates following the financial crisis. Why did it decide on a reversal from December? What has happened to change this outlook? The answer is nothing. Unemployment and inflation are stuck in their stellar positions. Wages are rising, albeit a bit more slowly than hoped for. On top of it all, the stock market is going through the roof. There is nothing bad here.

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The New York Times editorial board recently argued that nearly every year since 2009, Federal Reserve officials “let millions of Americans remain unemployed or underpaid.” Janet Yellen, who served as Federal Reserve chairman most of that time, is presumably the principal culprit. The New York Times cannot mean to level this charge. During her tenure, the Federal Reserve engaged in extraordinary support, including inventing programs like quantitative easing to lift up the economy. To suggest the Federal Reserve did not care about workers is specious.

Now comes Powell, the new Federal Reserve chairman, to the rescue. The New York Times said that he “offered hope” that the central bank is “finally learning its lesson.” All understand the vast monetary and supervisory powers of the Federal Reserve. Fewer understand its statutory mandate and limitations. In terms of economic policy, the Federal Reserve can only do what Congress tells it to do, which is limiting inflation and maximizing employment. This central bank mandate does not include addressing wage growth or inequality. You can take your complaints to Congress.

Those cheering on the more active dovish policymaking at the Federal Reserve do not appreciate the degree of independence that the central bank is sworn to by charter and committed to by practice, not lost on Democrats quietly ecstatic is that it is run by Powell and not Herman Cain. The New York Times wrote that Federal Reserve officials do not need to “endanger the welfare” of working Americans to “demonstrate their independence.” This is preaching to the converted or just hectoring.

Are cuts good for the immigrant communities represented by Alexandria Ocasio Cortez? Maybe a little but mostly it will go to the capital markets, helping the rich get richer and worsening inequality. When the Federal Reserve cuts interest rates, there is an immediate stimulative injection not into the broad economy, where jobs are created and wages earned and spent, but into the capital markets. Investment activity is stimulated and these markets expand. When it raises interest rates, the capital markets contract. The impact on the real economy is a muted and distant echo. Hiking interest rates has but a delayed and diluted impact on workers.

Only true believers of trickle down economics think that the working Americans who have benefited the least from the recovery so far will benefit from the interest rate cut. Pat Toomey is a Republican with more experience in financial services than anyone else on the Senate Banking Committee. His voting record on economic policy reflects a free market ideology, and he is saying the interest rate cut may not be appropriate. When someone speaks against apparent material or ideological or even political interests, like when a sitting Republican senator opposes Trump, one is tempted to listen carefully because it might be worth considering.

What is the appropriate monetary policy when your economy has been expanding for a record period? Would you be inclined to maintain current policy and add another hike after the one in December, or move to neutral and just keep things where they are? Or would you reverse course with a rate cut in a month where all three major stock indexes hit new records? Progressives who show Powell love might not love a Trump reelection fueled by an economic heat wave generated by the Federal Reserve.

Morris Pearl is the chairman of Patriotic Millionaires and former director at BlackRock. Dana Chasin is a principal at 20/20 Vision and former policy adviser to Hillary for America and Senators Jon Tester and Tim Johnson.