The final phase in Federal Reserve Chairman Jerome Powell's inflation battle is set to collide with another obstacle – the 2024 presidential election.
This sits ahead of a tipping point expected on Wednesday, when the Federal Reserve will announce whether it will cut interest rates for the first time since March 2020.
Interest rates are already a partisan issue going into November, where the economy and inflation are seen as the big issue for voters. Republican politicians warn that cutting rates would harm the Federal Reserve's credibility. Democrats have called on the Fed to cut rates for months.
Mr Powell has paid those directions little notice, instead using public appearances to repeat his data-driven narrative.
Today, the data points towards a rate cut. The Fed's preferred inflation measure is at 2.5 per cent and seen as on a sustainable path back to the Fed's 2 per cent goal. The labour market is softening, with the unemployment rate now at 4.2 per cent.
Now, Mr Powell aims to stick to the landing.
Doing so will require a careful calibration of interest rate cuts to not send the economy tipping into a recession.
But looming behind the 2024 election is the potential return to office for Donald Trump, whose recent comments threaten to undermine the Fed's independence.
“I feel the president should have at least [a] say in” monetary policy decisions, Mr Trump told reporters at his Mar-a-Lago estate in Palm Beach, Florida, about a month ago.
“I think that in my case, I made a lot of money, I was very successful, and I think I have a better instinct than in many cases, people that would be on the Federal Reserve or the chairman,” said the former president on August 8.
Should he return to office, Mr Trump could dismantle the guardrails that have protected the Fed for decades, said David Wilcox, senior fellow at the Peterson Institute for International Economics and director of US economic research at Bloomberg Economics.
“The potential for institutional damage is quite great, and the task of repairing any damage along those lines would be the work of many, many years, if not decades,” Mr Wilcox told The National.
A near-sacred principle
The consensus among economists is clear – politicians should not interfere with central banks.
Mainstream economists argue independent central banks are best equipped to tackle inflation because of their long-term view, as opposed to an electoral focus. Independent central banks also help to anchor inflation expectations, which is critical to price stability.
“The record is pretty clear that that's a good, intentional arrangement that serves the public well,” Mr Powell told politicians in July.
While the Fed is accountable to Congress, it enjoys broad independence to implement monetary policy decisions, and for the most part, without political pressure. This level of independence helps to secure the US dollar as the world's reserve currency.
The Fed's independence is “critical”, said Ryan Sweet, chief US economist Oxford Economics.
"A tremendous amount of research has shown that countries with independent central banks have more economic stability," he said.
"When inflation is typically lower, the labour markets perform better. So shielding ... any central bank from political pressure is typically in the best interest of the economy."
Vice President and Democratic nominee Kamala Harris has said she would never interfere with the Fed's independence.
When politics interfere
The Fed has not always taken the long-term view.
This year's electoral cycle conjures memories of former Fed chairman Arthur Burns, who caved in under pressure by president Richard Nixon to cut rates in 1970 even when the economy showed signs of overheating. Mr Nixon won re-election two years later, but the resulting decades were defined by a period of stagflation.
One of the more recent examples comes from Turkey, whose inflation rate is currently 51.97 per cent as of late August, according to New York-based economic statistics monitor Trading Economics.
Under pressure from President Recep Tayyip Erdogan, the Turkish central bank began cutting rates in 2021 even during a time of soaring inflation to encourage more capital investment. The gambit failed and the inflation rate climbed to a peak of 85 per cent.
Most recently, central banks in Brazil and Thailand have come under pressure from their governments, although they have so far fended off the pressure.
“The track record, both in the United States and around the globe, is pretty clear that when political figures become involved in day-to-day monetary policy decision making, the economic performance of that country tends to deteriorate,” Mr Wilcox said.
Trump's shadow looms
A report from The Wall Street Journal this year brought new concern to the future of the Fed's independence. The report, which included proposals that Mr Trump be consulted on monetary policy decisions as president, was met with alarm by economists.
“This is the bad idea of all bad ideas,” Joe Brusuelas, chief economist at consulting firm RSM US, wrote in a social media post at the time.
Mr Trump's campaign distanced itself from the report at the time, but the Republican nominee did little to downplay concerns last month.
With Mr Powell's term set to expire in 2026, the next president will have the opportunity to nominate the next Fed chairman. Mr Trump nominated Mr Powell to the position in 2018 to succeed Janet Yellen, although clashed with his appointee and went so far as to question if the Fed chairman was an enemy to the US in 2019.
Mr Trump told Bloomberg in July he would not try to fire Mr Powell, whose term as Fed chairman expires in 2026 and as governor in 2028, if he returns to the Oval Office. No Fed chairman or woman has been fired, and it is uncertain if the president has the authority to do so.
Mr Powell has said he intends to serve his full term as chairman.
