The high political stakes of Fed interest-rate cuts

livemint.com:

Stipulate that Federal Reserve Chairman Jerome Powell isn’t trying to throw the Fed behind one candidate or another in November’s presidential election. There’s still political danger for Mr. Powell and the central bank lurking in the September interest-rate cut Fed officials are priming investors to expect.

Mr. Powell on Wednesday delivered the strongest signals yet that a quarter-point rate cut may be coming in September, and investors hope for a total of three cuts before the end of the year. Unlike previous episodes of irrational rate-cut exuberance (remember when Wall Street thought we’d get six reductions this year?), this prediction may come true.

Inflation finally appears to be drifting toward the central bank’s 2% target, allowing the Fed to declare victory. Meanwhile, there are some signs the economy is softening despite healthy economic growth in recent quarters. The unemployment rate, while still low by historical standards, is drifting upward.

Mr. Powell on Wednesday suggested such developments again are on the Fed’s radar as it weighs future policy moves. The political problem for the Fed is that translating these general observations into specific policy decisions isn’t straightforward.

This is an important transition point for the central bank. Since early 2022, the Fed has taken the moderation of price rises to be its only job. It could hardly do otherwise amid the worst inflation in 40 years.

In theory this task was simple if not always easy, since the single target is observable in monthly data. And yet the central bank still found itself mired in controversy. Economists debate what caused the inflation and whether the Fed has deployed the correct tools to control it, while the general public complains