The views expressed by the business participants are their own.
As the 2024 election approaches, many voters are wondering how the different results will affect them financially. The big question is how the outcome of the presidential election will affect interest rates.
In July, the Federal Reserve chose to keep the federal funds rate steady at 5.25% to 5.50% after raising it 11 times between March 2022 and July 2023. The higher the federal funds rate, the higher the cost of borrowing for businesses and consumers. .
A sitting president has no direct influence on interest rates, but can influence them indirectly through his actions and policies. Let’s take a look at how each candidate’s policies could affect the financial situation going forward.
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What effect does the President have on interest rates?
The Federal Reserve aims to keep inflation around 2%, and it does this by raising or lowering interest rates. When inflation is too low, the Fed lowers interest rates to stimulate the economy.
Similarly, when inflation gets too high, the Fed raises interest rates to make it harder for banks to lend money to each other. When interest rates are high, business and consumer spending tends to fall, hopefully reducing inflation at the same time.
The Federal Open Market Committee (FOMC) sets the federal funds rate, which is a target interest rate range. However, there are several ways the President can influence interest rates:
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Removing the Fed chair: According to the Federal Reserve Act, the President can remove the Fed chair “for cause.” Some jurists have taken this to mean inefficiency, not policy divergence, but the law is unclear.
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Nominating members: The President can appoint the Chairman of the Federal Reserve and appoint the members of the Board of Governors. However, each term lasts 14 years, and the Senate must confirm each appointment, so the President’s authority is still limited.
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To express concern: The President can oppose the decisions of the Federal Reserve and make them public. However, they cannot prevent the Federal Reserve from raising interest rates.
It is also important to note that there are 12 regional banks located throughout the country. The President has no say as to who owns these banks.
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Election results can 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 take a look at how a win on either side could affect interest rates.
Kamala Harris wins:
When President Biden ran for re-election, the general consensus was that a Biden victory would almost certainly lead to a change in interest rates. But in July, Biden dropped out of the 2024 race, and Kamala Harris is now the Democratic presidential nominee.
It is difficult to predict how a Harris presidency will affect interest rates, especially since he has yet to fully outline his economic policies. Harris has called for tax cuts for low- and middle-class families and has promised to end Trump’s tax cuts if he wins the White House. And like Biden, Harris supports investing in green energy and infrastructure.
As a senator, Harris voted against the confirmation of Jerome Powell as chairman of the Federal Reserve in 2018. Others thought that there is little chance that he will re-elect him when his term ends.
Former President Trump wins:
If Donald Trump is elected in November, he will likely extend the tax cuts until at least 2027. His policies often allow for tax cuts and waivers, which benefit businesses and may increase demand for business loans. However, there is speculation that his tax cut plan could fuel inflation, prompting the Federal Reserve to raise interest rates to fight inflation.
During Trump’s tenure, there has been a major rift between him and Federal Reserve Chairman Jerome Powell. Many people were wondering if Trump would fire Chairman Powell if he was given a second term. Chairman Powell’s term ends in 2026, and the former President said that although he will allow Powell to finish his term, he will not re-appoint him.
The Federal Reserve has already indicated it may cut rates in September. However, if inflation becomes a concern or starts to rise again, the Fed can keep or raise interest rates.
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How to prepare for the election season
Election seasons can be stressful as many people wonder how the outcome will affect the economy and livelihoods. Fortunately, data shows that the market tends to perform well during an election year.
Even if the election result causes some volatility, the impact will likely be short-lived. Fundamental drivers of the economy, such as inflation and Federal Reserve policies, will likely have a greater impact on interest rates than the election itself.
For example, JP Morgan found that during the 2020 election, the end of the lockdown had more impact on the market than the views of any presidential candidate. Likewise, in 2008, the Financial Crisis caused the economy, not the election.
Inflation is slowing, and unemployment is at record lows, so it’s likely we’ll see a potential rate cut or two in 2024, regardless of who wins the presidency. But no matter what happens, there is no perfect time to get money. If you have an opportunity to grow your business, don’t let it pass because of election panic.
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