Paul Krugman on how a Fed rate cut could impact the election

Many investors believe the Federal Reserve will cut rates in September, just a few weeks shy of the election. There are concerns it could sway voters into favoring one candidate over another.

New York Times Opinion Columnist and Nobel Laureate Paul Krugman joins Wealth! to give insight into the political landscape of the 2024 US presidential election and how public perception of the economy could impact the results.

On how a Fed rate cut could sway voters, Krugman states: "Consumer sentiment might be affected, the narrative might change. I think one of the things that we've learned in the past couple of years is that consumer perceptions of the economy don't very closely follow the traditional variables, by the normal standards with low inflation. And we're about to get some new inflation numbers in the next couple of days, that will probably validate the idea that, basically, inflation is beaten, unemployment is still fairly low. Nothing is going to change on that front. But the Fed, if it cuts, that's kind of a prestigious voice saying that we're not worried about inflation anymore, which might affect things."

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This post was written by Nicholas Jacobino

Video transcript

So billionaires don't matter, but it seems like the low income voter that's going to matter in this election, especially given where we're at with this economy.

So what does the Harris campaign have to say?

What does the Trump campaign have to say to really uh start appealing to this cohort of voters?

Well, I mean, that's the thing is, it's not a homogeneous group.

You know, when we say low income voters, what do we mean?

Do we mean um small town whites, do we mean uh big city blacks?

Uh The, do we mean uh you know, it all together?

It's, it's just not the idea that there's some simple formula.

Uh Trump offers a lot of cultural stuff, validation maybe uh to, to some people, although, you know, he's got hope that people don't actually read JD Vance's book, which is actually quite contemptuous of the people he grew up with.

Um But uh on the other hand, uh Harris now, you know, it's, it's a really this, it's certainly a transformative moment now.

And let's remember that turnout among nonwhite voters, turnout among women are gonna ma is gonna matter enormously.

Um Some of the polling I saw said that actually, uh, before they, they stepped aside, Biden was polling about as well with whites as he did in 2020 but it was, was losing ground among nonwhite voters and Harris might make a difference, who knows?

But it's, it's certainly not the same game.

It was at all, not the same game.

And the game is potentially going to be changing on the fed side as well because likely ahead of the election.

Well, we will see a fed rate cut at least that's what markets are predicting.

If the fed cuts rates this month in September, November, what impact will that have on prices, consumer sentiment and really that lead up to the election?

Um you know, it shouldn't matter much uh because there are, as Milton Friedman famously said, long and variable lags, what the fed does today shouldn't affect the real economy for quite a few months, not till well after the election, but consumer sentiment might be affected.

Uh The narrative might change.

I think one of the things that we've learned in the past couple of years is that consumer perceptions of the economy don't very closely follow the traditional variables.

You know, by, by the normal standards with low inflation, we're about to get some new inflation numbers in the next couple of days that will probably validate the idea that basically inflate inflation is beaten.

Uh unemployment is still fairly low, nothing is gonna change on that front.

But the Feds, if it cuts, that's kind of a AAA prestigious voice saying that we're not worried about inflation anymore, which might affect things.

And just in general, I mean, there are some very early hints if you look at, you know, like the Goldman Twitter economic sentiment index that the economic sentiment has suddenly rolled over in a positive direction.

Um And we don't know that for sure.

We'll see.

But um, concretely, I mean, if you ask what, what impact will, what the fed does have on the unemployment rate on election day, the answer is, you know, margin of error.

Nothing, nothing.

There.

We ask what effect might it have on how people feel about the economy?

It might make a big difference.