Trump suggests Fed 'playing politics' after cutting US interest rates

Aggressive rate cut by US central bank comes less than two months before presidential election

Former US president and Republican presidential nominee Donald Trump makes a campaign stop in New York. AP

Former US president Donald Trump suggested the Federal Reserve was playing politics by cutting interest rates by 50 basis points, underscoring the political sensitivity of the central bank's decisions with the US election less than two months away.

The Fed on Wednesday lowered its benchmark target rate from 5.25-5.50 per cent to 4.75-5.00 per cent and projected it would cut interest rates by another 50 basis points this year.

“I guess it shows the economy is very bad to cut it by that much, assuming they're not just playing politics,” Mr Trump said in New York City before a campaign rally on Long Island. “The economy would be very bad or they're playing politics, one or the other. But it was a big cut.”

The policy reduction was the first in more than four years for the Fed, which first began its rate-increasing cycle in 2022 in response to a global inflationary surge.

Fed chairman Jerome Powell said the economy remains strong – pointing to economic growth, lower inflation and a cooling-yet-healthy labour market – and that the Fed's strong start to cutting rates was to ensure it did not fall behind the curve on easing policy.

Interest rates have become a partisan issue this year, as voters continue to rank the economy and inflation among their top issues. Republicans have generally urged the Fed to resist cutting rates during an election year, while progressive members of the Democratic Party advocated rate cuts months ago.

Wednesday's decision probably favours Vice President and Democratic nominee Kamala Harris, whose economic policies are thought to be more in line with the incumbent President Joe Biden. Mr Biden celebrated the announcement, saying “the critics” did not believe that inflation and interest rates could go down without harming the economy.

“While this announcement is welcome news for Americans who have borne the brunt of high prices, my focus is on the work ahead to keep bringing prices down,” Ms Harris said in a statement.

Mr Powell, who was nominated by Mr Trump for the position in 2018, has maintained a consistent stance that the Fed does not take politics into account when making its decisions.

Federal Reserve chairman Jerome Powell after a media briefing at the Fed building in Washington. AP

Mr Trump has previously suggested presidents should have a say in monetary policy decisions, which was met with alarm by economists.

Mr Powell defended the Fed's independence when pressed by reporters, saying a central bank that is insulated from politics is better equipped to tackle inflation.

“We're not serving any politician, any political figure, any cause, any issue, nothing. It's just maximum employment and price stability on behalf of all Americans, and that's how the other central banks are set up too,” he said.

“It's a good institutional arrangement which has been good for the public, and I … strongly believe that it will continue.”

Mr Powell's perspective is in line with the consensus among mainstream economists who say independent central banks typically perform better at maintaining price stability and unemployment.

Central banks' independence has been tested this year as banking officials around the globe seek to achieve a "soft landing", where they can reduce inflation without sending the economy into a recession.

Previous comments made by Mr Trump and reporting by media outlets – which suggest he could try to alter the make-up of the Fed – have placed additional emphasis on the independence of the agency as it seeks to guide the world's most significant economy to a soft landing.

Central banks in Brazil and Thailand have fended off recent pressure by their governments.

Meanwhile Turkey, whose central bank buckled under pressure from President Recep Tayyip Erdogan to cut rates in 2021, is now fighting an inflation surge. The country's inflation rate – which is now at 51.97 per cent – peaked at 85 per cent.