Investors anticipate no pre-election interest rate cut, dealing a significant blow to Biden

Investors now peg greater than even odds that there will not be a single interest rate cut until after the November election, a market outlook that complicates President Joe Biden‘s reelection bid.

Just four months ago, investors were pricing in up to six interest rate cuts from the Federal Reserve in 2024, with most expecting that the first cut would have happened in March. But on Tuesday, as top Fed officials huddle in Washington, D.C., investors think the Fed will hold off until at least November.

Investors implied a nearly 52% probability that the Fed will hold rates steady during its September meeting and then would cut during its November meeting, which happens just days after one of the most politically charged presidential elections in modern history, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.

Still, some investors are even more hawkish, and there are about 1-in-4 odds that the Fed won’t cut interest rates at all this year. Last week, there was about a 10% probability of no rate cuts in 2024, and a month ago, the odds of that were only 1% — showing how recent economic data are shaping perceptions.

The higher interest rates are a result of years of too-high inflation. The rate of inflation began to spike in early 2021 and peaked at over 9% in 2022. Since then, it has largely been falling as a result of the higher interest rates. This year, it has proven stickier than anticipated — not only bad news for the economy and consumers but also bad news politically for Biden.

Inflation, as gauged by the consumer price index, has wobbled between 3% and 3.7% since June 2023 but has not once fallen into the 2%-3% range.

The lack of any interest rate cuts would have some major effects on the election.

Republicans will undoubtedly use the higher interest rates to attack Biden and Democrats and blame them for the situation. Republicans have argued that the reason inflation got so hot is too much federal spending resulting in more dollars chasing the same number of goods and services and causing price hikes.

Democrats, though, have argued that the rise in inflation wasn’t their fault, saying it was driven by major supply constraints during the pandemic and that it hit other countries harder. They also have sought to blame corporations for unfairly raising prices.

But the economy is the No. 1 issue on the minds of voters, so any bad economic news is bad news for the incumbent president. Polls have consistently showed that too-high inflation is undercutting U.S. support for Biden because it, alongside higher interest rates, has made life much more unaffordable for voters.

Interest rate cuts would be seen as a positive for Biden because they would typically help the stock market and general economic investment and bring down rates on other consumer finance instruments, such as car loans and mortgages.

In early February, former President Donald Trump called Fed Chairman Jerome Powell, whom he appointed to the role, “political” and predicted he would lower interest rates ahead of the election. Trump has said he will not reappoint Powell should he win in November.

“It looks to me like he’s trying to lower interest rates for the sake of maybe getting people elected. I don’t know,” Trump said at the time.

Powell has recently taken a more hawkish approach toward interest rates, given the higher-than-anticipated inflation data.

At an event this month, he emphasized that the hotter-than-desired inflation reports over the past quarter have not provided the Fed the confidence it needs that price pressures are abating. Powell’s remarks are an acknowledgement of a recent major shift in expectations from investors regarding interest rates.

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The central bank’s interest rate target is 5.25% to 5.50%, a high level it has been at since July.

This week, the Fed is meeting and once again is expected to hold its rate target steady. Powell’s comments following the meeting of the Federal Open Market Committee will be closely watched by investors.