How the interest rate turnaround becomes an election campaign issue

The US Federal Reserve has significantly reduced the key interest rate – shortly before the election. Republican Trump has accused the central bank of playing “political games” – in favor of the Democrats. Fed Chairman Powell emphasizes: The central bank is independent.

The central bankers lowered the key interest rate by half a percentage point – many analysts had not expected such a large interest rate hike.

The reasons for this are obvious, said Fed Chairman Jerome Powell. “The labor market has cooled. Inflation has fallen considerably – from seven percent to an estimated 2.2 percent in August,” said Powell.

Inflation is falling

In June and July, the inflation rate was 2.5 percent, but it is now approaching the Fed's target of two percent.

The Fed also wants to use its decision to stabilize the economy. Lower interest rates make loans cheaper and thus stimulate the economy. Cheaper loans encourage consumption and investment and thus create jobs. The unemployment rate in the USA recently reached 4.2 percent, the highest level in three years.

“The US economy is in good shape. It is growing at a solid pace. Inflation is falling, the labour market is developing well. We want to maintain this,” stressed Jerome Powell.

Economy and high prices are Election campaign topics

This is likely to be good news for many US voters. Democratic presidential candidate Kamala Harris also said the Fed's decision was “welcome news for Americans who are bearing the brunt of high prices.”

In fact, the economy and high housing and food prices are the most important issues in the current election campaign. It is no wonder that Donald Trump has repeatedly and emphatically demanded that interest rates not be lowered before the election. Trump said yesterday on the sidelines of a campaign event in New York that the economy must either be very bad or the central bank is playing “political games”.

The Fed is politically independent

David Wessel, financial market expert at the Brookings Institution think tank, told PBS that the interest rate decision was unavoidable. “Whatever the Fed does, it is always accused of trying to influence the election result. If it had done too little, the Democrats would have said, you are holding back because of the election,” Wessel said.

Fed Chairman Jerome Powell also rejected the allegations. He stressed that the US central bank is politically independent. “We do our work in the service of all Americans, and not for any politician, for any political figure or cause,” said Powell.