The President of the United States has a troubled political future. His poll numbers remain weak both on the national level and in battleground states. He does not have the commanding lead in the popular vote he will need to overcome the Electoral College’s structural biases and win. Biden is also greatly limited by the prospect of third-party candidates and his inability to directly influence events.
From this weakened position, pundits have begun to cast about in hopes of an event that will change the fundamental nature of the race. Many have settled on lowered interest rates. They believe that lower interest rates will help Americans feel better about the economy. These improved feelings, in turn, will result in better poll numbers for the candidate who will currently get credit for economic performance. One believer in this theory is Joe Biden himself, who has predicted future rate hikes this year prior to his reelection.
Voters care about inflation
The logic behind this argument makes sense. Americans seem to be pessimistic about the function of the economic system. They are unable to properly understand or process good news because that good news seems so insignificant to their general economic malaise. Interest rates will provide a clear banner that the economy is improving and that the news they hear about unemployment and consumer spending is not a fluke. Reuters quoted a Biden pollster last month arguing that, “Rate cuts are massively popular with people. It will really help build confidence in the economy just as people are paying closer attention to the election.” Furthermore, interest rate cuts will help many people buy and afford a house. In today’s skyrocketing housing market, such a reprieve should help house-hunting Americans look favorably on the current administration.
The problem with this analysis is that Americans are not necessarily worried about overall economic health or signals to business. They are worried about inflation, full stop. A recent Gallup poll rated high prices as the top concern of Americans, with 55% responding that they are concerned “a great deal” about inflation. They do not rush online to clamor about tech layoffs or uncertain bond yields. They complain about high gas prices, high grocery prices, and the rising cost to eat out. Day after day, the American people show they are unhappy that the aspects of their daily lives are more expensive. Many have forgotten about their years of large raises and stable employment or even their cheaper credit card borrowing rates during 2020 and 2021. They want the party in charge of these higher prices to either fix the problem or step aside, and if it were not for the odious nature of Donald Trump they would turf out the current party in a landslide.
Could interest rates help?
In this situation, Joe Biden may actually benefit from higher interest rates. These higher rates have the possibility of keeping dollars out of the economic system and reducing inflation over the next six months. Lowering inflation could help Americans feel better about the country’s economic outlook and reward Biden as a result. It would also be far from permanent. The Fed could cut interest rates throughout 2025 and still prevent the substantial rise in unemployment that may eventually come from high rates.
A clear exception to this policy is housing prices. Higher interest rates may mean lower prices for most goods, but they do mean higher housing prices. However, there is no evidence that a drop in interest rates alone will substantially change the nation’s housing crisis. Housing prices spiked in 2020 and 2021 when rates were essentially zero and rose throughout the late 2010s with minimal rates. These prices are more contingent on zoning, local business conditions, and the national climate for homebuilders than they are solely on interest rates. A drop in interest rates would gamble two years of easing inflation on an outside chance housing prices may come down, one that would likely not happen due to a simple interest rate drop.
Joe Biden may benefit from lower interest rates. The economic boost could be so strong that it cures Americans of their pessimistic economic attitude while not raising average prices. But the risks may also outweigh the benefits. Biden needs to watch from the sidelines and do as much as he can to respond to the concerns of Americans on the level of executive actions. His presidency may depend on it.
