- The economy could play an important role in the American presidential elections this fall.
- The timing of interest rate cuts by the US central bank is of great importance.
- Currency expert Joey van Hanegem from Ebury discusses what this could mean for President Joe Biden’s campaign.
ANALYSIS – With the American presidential elections in November approaching, it will be very important for both incumbent President Joe Biden and his very likely challenger Donald Trump how the American economy will perform at the end of this year. The timing of interest rate cuts by the US central bank can be of great importance.
It is therefore not surprising that this year, also for political reasons, very close attention is being paid to the Federal Reserve’s plans with regard to interest rate policy.
The US central bank decided last month to leave the policy interest rate unchanged, as expected. The Fed directors indicated that they wanted to see more evidence that US inflation is cooling further towards the intended target of 2 percent. After all, inflation is no longer falling as quickly as the central bank would like.
Despite the uncertainty about inflation, the Federal Government has announced that it plans to cut its policy rate three times later this year. In principle, this means that US businesses will have more opportunities to borrow more cheaply on the capital market to finance growth. In theory, this could give the economy a positive boost.
The question, however, is what the average consumer will notice, because in-store prices often fall more slowly than they rise.
Dollar remains strong
The dollar initially fell slightly in response to the March interest rate decision, but that turned out to be short-lived. This is partly due to the expectations that the Fed has expressed for interest rate developments after this year
Specifically, it concerns the expectation for 2025. Instead of the four interest rate cuts that were initially taken into account, the Federal Reserve indicated at the March interest rate meeting that it was aiming for three interest rate cuts next year. This has likely contributed to an upward revision of the dollar.
If interest rates in the US fall less sharply in 2025 than previously thought, this will make the dollar relatively more attractive, because dollar investments could offer higher interest returns in the future.
Another reason why the dollar’s downward move was short-lived lies in the attitude of other central banks. For example, the central banks of the United Kingdom and Switzerland have given quite strong hints as to the intended rate cuts later this year, while the Federal Reserve is somewhat less clear about the intended timing of the rate cuts.
Moreover, the absolute level of the US policy rate, which is kept between 5.25 percent and 5.5 percent, is quite high. That also makes the dollar relatively attractive.
Can Biden still benefit from lower interest rates?
With regard to the American election campaign, it remains exciting to see how the combination of a relatively strong dollar for the time being and the expectation of interest rate drops in the second half of this year will affect the economy.
The question remains whether Biden has enough time to benefit from lower interest rates. In any case, the message will be that the current Democratic government has put the economy back in order after the corona crisis and that companies can invest more easily now that inflation has been curbed.
Meanwhile, challenger Donald Trump has found bridge financing for a $175 million legal fine. In this context, it would not be a bad idea for Trump if interest rates fell.
Joey van Hanegem is a currency expert at Ebury
