Fed risks Trump’s wrath with historic rate cut

The US Federal Reserve cut its key interest rate by 0.5% on Tuesday, putting it at the centre of a political storm.

The European Central Bank cut its main interest rate from 5.25% to 5.50% to 4.75% to 5%. Markets immediately rallied after the cut, the biggest since the measures taken to combat the crisis in 2008 as the economy collapsed into the Great Recession.

But the cut is also the most politically charged move by a rate-setting body in recent history — because former President Donald Trump repeatedly called for holding rates steady ahead of the election. He and his aides believe that lowering borrowing costs would benefit Vice President Kamala Harris’s campaign by convincing people of the strength of the economy and easing concerns about inflation.

While lowering interest rates would not immediately lower most people’s mortgage payments, and would reduce monthly payments for some retirement plans, cheaper rates would also reduce inflationary pressures on everyday living costs, such as credit card bills. Lower mortgage rates would also lower homebuying costs and potentially free up a frozen housing market.

The Fed, under its chairman Jerome Powell — a Trump appointee who has since been publicly shunned by the former president — voted to cut after months of falling inflation reports and slowing job growth. Economists believe that if it hadn’t acted, higher interest rates would have increased the chances of a recession.

The last time interest rates were this close to an election was in September 1992, when the economy was still emerging from recession. This ultimately did not save President George H.W. Bush from being defeated by Bill Clinton, who campaigned on the slogan “The economy is the problem, stupid.”

But this time the move is sure to create major political tensions, as Trump has already indicated that he wants to take control of the independent Federal Reserve if he wins in November. In July, Trump announced that he would decide whether to… He told Bloomberg He said he would not fire Powell but added, “especially if I think he’s doing the right thing.”