MEETING OF THE MINDS — When the Federal Reserve has its next scheduled meeting on Sept.17 — the last one before the election — the agenda will include a decision that could tilt momentum in the 2024 election and set the course for the future of the American economy. The financial markets overwhelmingly expect that the Fed will cut interest rates for the first time since March 16, 2020, during the onset of Covid. But whether the cut will be a standard quarter percent (or 25 basis points) or a more aggressive half percent (50 basis points) remains an open question. And before the board meets, a monumentally important jobs report — due this Friday — will go a long way towards deciding their path forward. The Harris and Trump campaigns likely have that report date circled, starred and underlined. A stronger than expected jobs report, and Vice President Kamala Harris will be able to reasonably claim that the economy is on the right track, the Fed is acting to bring interest rates down and the Biden-Harris administration is on the way towards a strong jobs market coupled with low inflation. A weak one and the Fed will look as if it’s behind the eight ball, bolstering former President Donald Trump’s claims that the economy is weak and the Fed is feckless. Trump claims that he would like to return to an older model where the president maintains more control over the Fed’s decision-making. Aside from the November implications, the Fed’s action this month could have a significant effect on the stock market — which hangs on every word from Chair Jerome Powell — and on other asset classes. While the economic picture in 2025 and beyond remains murky, it’s about to come into slightly clearer focus in the next two weeks. To get a better understanding of what the Federal Reserve is poised to do and the political and economic implications, Nightly spoke with Dr. Yung-Yu Ma, a leading market analyst who serves as chief investment officer for BMO Wealth Management in the United States. This conversation has been edited. Is an interest rate cut a lock at the September Fed meeting? That does seem locked in at this point. I think there’s even a question of whether the Fed will cut interest rates by a quarter percent, which is what certainly seems like a lock, versus a half percent. I think that is going to be mainly dependent on the jobs report that comes out on Friday. If we see some weakness in that report that causes the Fed a bit of concern, then there might be momentum building to the downside in the labor market. In that instance, I do think the Fed would seriously consider cutting by a half percent in September. What are the important differences between a 25 basis point cut and a 50 basis point cut? How might those affect the stock market? We want to think about this in context of what’s bringing the Fed to cut rates. If it looked like there was just a little bit more softness in the job market than they were anticipating and they decided to be aggressive to cut by half a percent to offset or combat that, then I think that would be taken well by the markets. If it’s simply the case that the jobs report that comes out on Friday and covers August is a very weak jobs report, and the Fed is almost compelled or pushed to cut 50 basis points, then it would be seen as being behind the curve a little bit. In that instance, I don’t think a half point cut is going to lift the market higher; the thought is going to be that the Fed has to play a little bit of catch-up. The question is whether the Fed appears to be ahead of the curve, at the curve or behind the curve. I think there’s a little bit of a feeling right now that the Fed is behind the curve if it just cuts by a quarter percent. And if data softens a little bit, and the Fed still cuts by a quarter percent, I think it will be perceived as being behind the curve, and probably the markets won’t like that. As you may recall, a month ago it was the prior jobs report that sent the market into a tailspin. How and when will ordinary voters feel the aftershock of a rate cut? How will it change their lives? I think it’s going to take a little while for a lot of things to come into play here. There are things happening on the ground that could happen a little bit sooner. For example, in anticipation of these rate cuts auto companies are already rolling out better financing deals. They’re more willing to lock in a three- or five-year loans offering 1.9 or 2 percent financing, knowing that over the next couple of years rates are coming down, whereas a year ago that was almost unheard of. But if you think about the broader effect of rate cuts in terms of helping economic growth, that’s just going to take some time. That’s more of a 2025 story, when companies have cheaper borrowing costs, so they can therefore expand more or be more willing to take on new projects or hire workers or invest more. A quarter percent is not going to do it. You need to get to a full percentage point — which we’ll probably get by the end of the year — before some of the dynamics that permeate the economy and help everyone feel better come into play: Better economic growth, more opportunities, if you run a small business things just kind of picking up. What direct political effects might be felt between now and November based on the jobs report and rate cuts? Could those numbers move the ball in one direction or another? The Fed is doing a good job of trying to stay out of the politics and just look at the economics of it. I do think there’s a marginal voter out there that has been upset about the effects of inflation over the past couple of years. Rate cuts aren’t going to be helpful in a direct, immediate sense to offset that feeling. But I think that these numbers will determine which narrative takes hold better — Trump’s, that the Fed is playing politics cutting rates right before the election and the economy is weak, or Harris’, that the economy is back on track, inflation is down, interest rates are coming down and we’re on the cusp of brighter days. If we get a worsening jobs report on Friday, and then another bad one in early October, I think that could add to the perception that the economy just hasn’t been well managed under the current administration. That’s going to be the narrative that Trump tries to hammer home. If there’s enough data to support that case, then I think there’s potential that could resonate with some voters. Despite the stock market being up and the labor market being okay, I don’t think the average American feels that the economy is great. So, in that scenario, would a stronger than expected jobs number help Harris’ case? I think so, yeah. I think Harris’ case is: Look, we’ve weathered the storm, the economy is on stable footing and brighter days are ahead. Stick with us. If you get data that supports that, then that helps to drive the case home. If, however, we get information this week and next month that suggests that maybe we’ve gotten inflation down but we’ve got a worsening economy, then we’ve gone out of the frying pan and into the fire. Welcome to POLITICO Nightly. Reach out with news, tips and ideas at nightly@politico.com. Or contact tonight’s author at cmchugh@politico.com or on X (formerly known as Twitter) at @calder_mchugh.
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