Rate cut could lift consumer spirits before US elections

The US Federal Reserve's decision to cut interest rates by half a percentage point gives consumers a much-needed psychological boost ahead of November's presidential election.

Analysts expect any economic impact of the first rate cut for four years to be modest, and some see it as having only a marginal impact on voting.

But that could still move the needle in an election where Democratic Vice President Kamala Harris is essentially tied with her Republican opponent, former president Donald Trump.

Voters have consistently named the economy as their top concern.

In a close election like 2024, "rate cuts at the margin help Vice President Harris," Oxford Economics senior economist Nancy Vanden Houten told AFP.

Rate cuts typically lower borrowing rates over time, putting more money in consumers' pockets, which in turn fuels demand in the economy.

But this takes time -- something Harris doesn't have, given the election is less than seven weeks away.

"We might not see a huge difference in the economic data, but one thing it might do is give consumer spirits a bit of a lift," she added.

US consumer confidence rose for much of the 2010s under Barack Obama and Trump, before taking a nosedive at the onset of the Covid pandemic from which it has yet to recover, according to survey data from the Conference Board.

Given the lags with which monetary policy works, any economic benefits from the Fed's rate cut are unlikely to be felt before the election, according to KPMG chief economist Diane Swonk.

"The Fed doesn't have a horse in that race," she wrote in a recent blog post, adding: "That will not stop politicians on both sides of the aisle from blaming the Fed."

It's also hard to guarantee that a rate cut will have a positive impact on the economy, given all of the other factors that shape it.

"The economy is not going to go in one direction or another as a function of a 50 basis point rate cut," EY chief economist Gregory Daco told AFP.

"Most people have no idea what the fed funds rate is," David Wessel, a senior fellow in economic studies at the Brookings Institution, told AFP, referring to the bank's benchmark lending rate.

"They know if they got a raise. They know what the price of eggs are. They know if their kid graduated from college and couldn't find a job," he said.

"Given the choice we face as a society between Kamala Harris and Donald Trump, I find it really hard to believe that interest rate moves of a quarter, a half, even a full percentage point, are going to really make a difference," he added.

One area where the Fed hopes its cuts will have an impact is on the labor market, which has shown signs of cooling, with unemployment rising and job creation slowing in the high interest rate environment.

By loosening monetary policy, "What the Fed is doing is making borrowing cheaper, and that would, if the world works as it usually does, make it easier for businesses to borrow, to invest, expand," said Wessel from Brookings.

"So it should have a beneficial impact on the job market," he added.

"To some degree, the anticipation of rate cuts caused interest rates on things like home mortgages to already start to decline," Vanden Houten from Oxford Economics said.

"But I think that the path that the Fed laid out yesterday was a bit more aggressive in terms of how quickly they're going to lower rates," she continued.

"That, in the end, is helpful for consumers in terms of buying things with borrowed money," she added.