Pre-Election Rate Cuts Would Mean More Inflation

As the 2024 election approaches, President Biden would like to see interest rates come down because lower rates can boost economic growth by making borrowing cheaper for everyone.

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As the 2024 election approaches, President Biden would like to see interest rates come down because lower rates can boost economic growth by making borrowing cheaper for everyone.

This means people and businesses are more likely to spend and invest, which helps the economy grow. Lower interest rates can also reduce unemployment as businesses expand and hire more workers.

A strong economy can make voters feel more confident and secure, which is good for any president seeking re-election. Plus, lower rates help ease the debt burden, giving people and businesses more money to spend and invest.

However, interest rate cuts will drive up inflation, which has been at near record levels for much of the Biden administration. Basically, workers, taxpayers, and consumers will suffer long-term so that Biden can get more votes in the short term.

In theory, the US Federal Reserve is independent of the US government and makes monetary policies, like raising or lowering interest rates, based on their analysis of the economy.

Typically, the Fed would lower interest rates if there are signs of an economic downturn, high unemployment, low inflation below their 2% target, or global economic issues that could negatively affect the US economy.

By lowering interest rates, the Fed aims to encourage borrowing and spending, boost business investments, and stimulate overall economic activity to support growth and stability.

It is in Biden’s interest to convince the Fed that conditions justify a rate cut. Recently, Fed Chairman Jerome Powell stated that the US economy is “no longer overheating.” This statement suggests he might be preparing to announce that rates will be cut soon.

Mortgage demand is dropping, which is generally a sign that rates should be cut. However, the normal Fed targeted inflation rate in the US is 2%, and we are currently at about 3%, which is well above the 2% norm. Decreasing the interest rate will raise the inflation rate, and we could be back to where we were a year ago in no time.

Rate cuts usually lead to job creation, but Biden keeps telling us that the job market is fine, even great. He claims to have created a record number of jobs. So, how can he justify cutting interest rates? Most Americans realize that despite what the White House claims, the job market is terrible.

A large chunk of the jobs Biden claims to have created were simply people returning to work after the pandemic lockdowns, rather than new jobs being created.

Additionally, many of these new jobs are part-time, with the number of workers being forced to switch from full-time to part-time growing steadily.

Furthermore, the workforce participation rate remains lower under Biden compared to pre-pandemic levels, suggesting that more people are either not working or not finding enough employment to make a living.

This indicates that while job numbers appear strong, the quality and stability of these jobs and overall workforce engagement tell a more nuanced story.

The full employment unemployment rate, also known as the natural rate of unemployment or the non-accelerating inflation rate of unemployment (NAIRU), is typically considered to be around 4% to 5% in the United States.

This rate includes frictional and structural unemployment but excludes cyclical unemployment, which occurs due to economic downturns. The US unemployment rate is currently 4.1%, but it has been rising to that level, and the trend is continuing. This suggests that we will soon no longer be at full employment.

If we take Biden at his word and ignore the data, the US is doing just super: everything is great, everyone has a job, and inflation is down. So, how can he justify a rate cut? Of course, being a trained economist, I prefer to go by the numbers. And they show inflation is still up and will definitely get worse if rates are cut.

Given the current economic conditions—high inflation, full employment, rising unemployment, and a shift from full-time to part-time work—cutting interest rates might not be a good idea. Lowering rates could increase spending and borrowing, which might worsen inflation.

The move from full-time to part-time jobs and lower labor force participation shows deeper issues in the job market that interest rate cuts alone can’t fix. Resolving these problems requires government policies that are opposed by Democrats.

There have been many reports about the negative impacts of forced minimum wage increases, like in California, where companies have responded by laying off workers or cutting hours.

Similarly, the formation of unions in some workplaces has led to reduced hours and even firings. Unions and minimum wage hikes create unrealistic expectations, leading people to reject lower-paying jobs. Additionally, liberal unemployment benefits often pay better than low-wage jobs, disincentivizing work.

To address the current economic situation, the government should reconsider mandatory minimum wage hikes that strain businesses.

Reducing unemployment benefits and other social transfer payments will incentivize higher workforce participation, while cutting government spending will reduce inflation by lowering the fiscal deficit and decreasing the money supply.

These steps, along with promoting free-market policies, could stabilize the economy, improve job quality, and ensure sustainable growth. But they would be unpopular with Biden’s base, who expect free government money and high wages for low-level labor.

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