Fed's Rate Hike Timing Questioned but Not Politically Motivated

Peter Navarro, White House trade adviser, accused the Federal Reserve of election interference over its September 16 rate hike, calling it a move unsupported by data. He also criticized a half-point cut in September 2024, suggesting it was politically motivated to aid Kamala Harris. While Navarro argued the hike was a mistake, he misattributed the motive. The real issue was the Fed's failure to wait for a pending revision to its key inflation gauge, the price index for personal consumption expenditures (PCE).

The Commerce Department had announced an upcoming revision to the PCE, which forecasters expected to lower core inflation by one or two tenths of a point. Governor Christopher Waller noted the revision could reduce 12-month PCE inflation by a few tenths. The revision, released after the vote, cut July's core rate from 3.3 percent to 3.0 percent, more than anticipated. This revision steepened the downward trend in inflation, making the Fed's rate hike premature.

Navarro's claim of political motivation was undermined by the fact that the three regional Fed presidents dissenting in favor of a hike were not presidential appointees. Additionally, Chairman Kevin Warsh, a Trump appointee, argued that consumer price trends had not improved meaningfully. The September 16 meeting date was set in August 2024, long before any political considerations could influence it.

Pressure on the Fed from political figures can have lasting economic consequences, including higher prices. Historical data shows that sustained political pressure on the Fed leads to inflation, posing a greater risk than a single mistimed meeting. The Fed should clarify its reasoning by releasing the minutes of the September meeting, detailing how the pending revision was considered. Moving forward, the committee should publish staff expectations for scheduled revisions to ensure transparency.