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As the 2024 election grows closer, many voters are wondering how different outcomes will affect them financially. A big question is how the outcome of the presidential election could affect interest rates.
In July, the Federal Reserve chose to keep the federal funds rate steady at 5.25% to 5.50% after increasing it 11 times between March 2022 and July 2023. When the federal funds rate is high, this increases the cost of borrowing for businesses and consumers.
The sitting president doesn't have a direct impact on interest rates, but they can indirectly influence them with their actions and policies. Let's look at how each candidate's policies could affect the financial landscape going forward.
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How does the President impact interest rates?
The Federal Reserve aims to keep inflation at around 2%, and it does this by raising or lowering interest rates. When inflation falls too low, the Fed lowers interest rates to stimulate the economy.
Likewise, if inflation gets too high, the Fed raises interest rates to make it harder for banks to borrow money from each other. When interest rates are high, business and consumer spending tends to slow down, hopefully reducing inflation at the same time.
The Federal Open Market Committee (FOMC) sets the federal funds rate, which is the target interest rate range. However, there are several ways the President can influence interest rates:
Removing the Fed chair: According to the Federal Reserve Act, the President can remove the Fed chair "for cause." Some legal scholars have taken this to mean malfeasance, not policy differences, but the statute is ambiguous at best.
Nominating members: The President can appoint the Federal Reserve Chair and nominate members of the Board of Governors. However, each term lasts 14 years, and the Senate has to confirm each appointment, so the President's authority is still fairly limited.
Voicing concerns: The President can disagree with the Federal Reserve's decisions and express them publicly. However, they can't prohibit the Federal Reserve from raising interest rates.
It's also important to note that there are 12 Federal regional banks located across the country. The President has no say in who runs these banks.
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Election outcomes that could affect interest rates
The President's policies and actions can indirectly affect the Federal Reserve's decision to raise or lower rates. There are two major candidates in the upcoming 2024 election — let's look at how a win on either side could affect interest rates.
Kamala Harris wins:
When President Biden was running for re-election, the general consensus was that a Biden victory would result in almost no change to interest rates. But in July, Biden dropped out of the 2024 race, and Kamala Harris is now the Democratic nominee for president.
It's hard to predict how a Harris presidency would impact interest rates, especially since she hasn't fully outlined her economic policies. Harris has urged lowering taxes on lower and middle-class families and has promised to repeal the Trump tax cuts if she wins the White House. And like Biden, Harris supports investing in green energy and infrastructure.
As a Senator, Harris voted against Jerome Powell's confirmation as the Federal Reserve chair in 2018. Some have speculated that she's unlikely to reappoint him when his term ends.
Former President Trump wins:
If Donald Trump is elected in November, he will likely extend tax cuts until at least 2027. His policies tend to favor tax cuts and deregulation, which benefits businesses and could increase the demand for business loans. However, there's speculation that his plan to cut taxes could drive inflation higher, causing the Federal Reserve to raise interest rates to combat inflation.
During Trump's term, there was significant tension between him and Federal Reserve Chairman Jerome Powell. Many people have wondered whether Trump will fire Chairman Powell if granted a second term. Chairman Powell's term ends in 2026, and the former President has stated that while he'll allow Powell to finish his term, he will not reappoint him.
The Federal Reserve has already indicated it might cut rates in September. However, if inflation becomes a concern or begins going up again, the Fed could maintain or even increase interest rates.
How to prepare for election season
Election seasons can be stressful as many people wonder how the outcome will affect the economy and their livelihood. Fortunately, data shows that the market tends to perform well during an election year.
Even if the election outcome creates some volatility, the impact will likely be short-lasting. Fundamental drivers of the economy, like inflation and Federal Reserve policies, will likely have a bigger impact on interest rates than the election itself.
For example, JP Morgan found that during the 2020 election, the ending of lockdowns impacted the market more than the views of either presidential candidate. Likewise, in 2008, the Financial Crisis was the primary driver of the economy, not the election.
Inflation is decreasing, and unemployment is at an all-time low, so it's likely we'll see a potential rate cut or two in 2024, regardless of who wins the presidency. But regardless of what happens, there's never a perfect time to access capital. If you have an opportunity to grow your business, don't let it pass you by due to election fears.
