Will the Fed skip a September rate cut to avoid looking political?

The Federal Reserve could choose to keep interest rates unchanged through the upcoming presidential election, according to Hooman Kaveh, chief investment officer at Mercer LLC.

In a Bloomberg Television interview Tuesday, Kaveh suggested the central bank might be inclined to maintain its current rate to avoid the perception of influencing the election outcome.

"You would be tempted if you were a Fed governor to say 'let's stay as we are, stay on hold until after the presidential election'," Kaveh said.

While many observers anticipate a long-awaited rate cut in September, Kaveh suspects that the Fed might opt for a more cautious approach. They’d have some good reasons to justify it.

“Economic growth is solid, employment is fine though trending a little bit off, and inflation is behaving itself,” Kaveh said.

"As long as things look okay, which they seem to do, and the Fed’s current policy is not putting undue pressure on any particular domestic or international factors, then I think they’re probably comfortable to sit tight.”

Economist says a pre-election rate cut "shouldn’t matter much"

Presidential candidate Donald Trump has made it clear where he stands. In a recent interview with Bloomberg, Trump warned against rate cuts ahead of the election, stating it was "something that they know they shouldn't be doing."

Despite his past criticisms of Fed Chair Jerome Powell, Trump indicated he would allow Powell to serve out his term to May 2025 if he is reelected, provided Powell was "doing the right thing."

Meanwhile, Nobel Prize-winning economist Paul Krugman told Yahoo Finance a September rate cut "shouldn't matter much: "What the Fed does today shouldn't affect the real economy for quite a few months, not until well after the election," Krugman said.

However, he acknowledged that Fed actions could shape people’s outlook on the economy. "If [the Fed] cuts, that's a prestigious voice saying, 'We're not worried about inflation anymore,' which might affect things,” he said.

The Fed cut rates in the 1992 and 2008 elections

The Fed has made election-season rate cuts in the past.

Meera Pandit, global market strategist at J.P. Morgan Chase, pointed out in a recent commentary that the Fed cut rates within two months of elections in both 2008 and 1992.

According to him, the cuts occurred during economic downturns and did not prevent a change in the party controlling the White House.

"Whether the Fed was adjusting based on dynamic economic conditions, responding to severe recessions, or following a path already forged, it continued to pursue its dual mandate irrespective of elections," Pandit wrote.

Ultimately, Kaveh believes the Fed will prioritize avoiding even the appearance of political meddling and sidestep a September rate cut. "The Fed will want to minimize any interference in what is going to be obviously a contentious run into the election," he said.