Nobel laureate Paul Krugman: Fed rate cuts have "little impact" on presidential elections

There is a general expectation that the Federal Reserve will cut interest rates in September, less than two months before the November election.

Prior to this anticipated move, Federal Reserve Chairman Powell has been facing pressure from lawmakers of both parties, including former President Trump. The latter stated in an interview with Bloomberg last month that rate cuts are "something they know they shouldn't be doing."

However, Nobel laureate in economics Paul Krugman, in an interview, mentioned that considering the lagged impact of monetary policy on the real economy, the rate cut in September "should not have much impact" on the election.

Krugman said, "The actions taken by the Federal Reserve today will not have an impact on the real economy for quite a few months, until after the election."

Cooling inflation data and rising unemployment rates have fueled the argument for the Federal Reserve to cut rates sooner rather than later. The market believes that there is almost a 100% chance of a rate cut by the Federal Reserve within two months, and is confident that the Fed's easing cycle will begin in September.

Krugman stated, "Specifically, if you ask whether a rate cut by the Federal Reserve will have any impact on the unemployment rate on election day, the answer is none. If you ask if this may affect people's perceptions of the economy, then there may be significant differences."

He added, "I think one thing we have learned in the past few years is that consumers' perceptions of the economy do not strictly follow traditional variables. If the Fed cuts rates, it is a prestigious voice saying, 'We are no longer concerned about inflation,' which could influence the course of events."

The "Politicization" of Monetary Policy

Trump has often criticized Powell during his first term, but last month he also told Bloomberg that he would let the Fed Chairman complete his term, "especially if I think he is doing the right thing."

However, Krugman pointed out that Trump's tariff policy would lead to "relatively serious inflation," forcing the Federal Reserve to counter it.

He said, "Compared to the Biden administration, the Trump government will be more likely to trigger inflation. But if history has taught us anything, this does not mean that Trump would welcome the idea of Powell raising rates."

Krugman stated, "Regardless of how Trump talks about keeping Powell in his position now, if the inflation rate rises during Trump's second term, the idea of letting the Fed freely raise rates is a pipe dream."

The economist also added, "Whoever actually serves as the Federal Reserve Chairman, we will see the politicization of monetary policy. In most cases over the past few decades, presidents have been very cautious, avoiding making the Fed look like a political pawn. But these rules do not apply to the future Trump administration."