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      When Will the European Central Bank Start Cutting Rates?

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      Interest rate cuts could start as soon as April, investors say. But the eurozone’s central bank, which held rates steady on Thursday, has said it will probably wait longer.If what goes up must come down, then the urgent question on the minds of many in Europe is when will interest rates begin dropping? For months, rates have been set at the highest in the European Central Bank’s history.Despite the protests of the eurozone’s policymakers, investors have been betting that the central bank will cut rates quite soon — possibly in April. Traders figure rates must come down because inflation has slowed notably — it’s been below 3 percent since October — and the region’s economy is weak. By the end of year, the central bank will have cut rates by more than 1 percentage point, or between five and six quarter-point cuts, trading in financial markets implied.Policymakers, however, are trying to pull market opinion in the other direction and delay the expectations of rate cuts. Many of the central bank’s Governing Council are wary of declaring victory over inflation too soon, lest it settle above the bank’s target of 2 percent.On Thursday, the European Central Bank stuck to this outlook. It held interest rates steady, leaving the deposit rate at 4 percent, where it has been since September. The bank said rates were at levels that, “maintained for a sufficiently long duration, will make a substantial contribution” toward returning inflation to 2 percent in a “timely manner.”Benchmark interest rate in the eurozoneEuropean Central Bank’s deposit facility rate.

      Source: European Central BankBy The New York TimesInflation in the eurozoneYear-over-year change in consumer prices in the eurozone.

      Source: EurostatBy The New York TimesWe are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber?  More

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      Why Donald Trump Will Soon Be Attacking the Fed

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      Interest rates are heading down. Maybe not today, and maybe not tomorrow, but soon, and for the rest of this year (at least).Why? Because there are very good reasons for the Federal Reserve, which controls short-term interest rates — that’s how it makes monetary policy — to start reversing the sharp rate hikes it carried out beginning in March 2022. There’s a vigorous debate about whether those rate hikes were excessive, which I’m not going to litigate here. Whatever you think about past policy, the case for cuts going forward is very strong, and I hope the Fed will act on that case.What I don’t know is whether the Fed is ready for the political firestorm it’s about to face, and whether it will stand up to the pressure to keep rates too high for too long. Because it’s a safe prediction that Donald Trump and his supporters will scream that the coming rate cuts are part of a deep-state conspiracy to re-elect President Biden.Let’s talk first about the economics, which should — but might not — be the only thing guiding the Fed’s decisions.The Fed raised rates in an attempt to rein in inflation, which was running hot at the time — its preferred measure of underlying inflation was running far above its target rate of 2 percent. It kept raising rates until the middle of 2023, trying to cool off the economy and ensure that inflation came down.As it turns out, the economy still hasn’t cooled much, at least by the usual measures; the unemployment rate remains near a 50-year low. But inflation has plunged. Over the past six months, the core personal consumption expenditures deflator — try saying that five times fast — has risen at an annual rate of only 1.9 percent, below the Fed’s target, and more complex measures are close to 2 percent. Basically, the war on inflation is more or less over, and we won.So why keep interest rates this high? Right now the labor market looks a lot like it did on the eve of the pandemic, with both unemployment and other measures of market heat, like the rate at which workers are quitting, similar to what they were in late 2019. The Fed is projecting higher inflation over the next year than it was in 2019, but only slightly higher.Back then, however, the federal funds rate — the interest rate the Fed controls — was 1.75 percent. Now it’s 5.5 percent. It’s really hard to come up with a good reason it should stay that high.True, high rates haven’t produced a recession — yet. But there are hints of economic weakness, and the Fed is supposed to try to get ahead of the curve. So it’s time to start cutting rates.But rate cuts will have political implications. They will be good for Biden, although not exactly for the reasons you might think.I don’t know what the unemployment rate or the rate of economic growth will be in November, but because monetary policy works with a lag, what the Fed does in the next few months won’t have much effect on these numbers.Biden, however, is already presiding over a very good economy by normal standards, with solid job growth and plunging inflation. What he needs is for more Americans to accept the good news. And Fed rate cuts will help him with that. They will signal to the public that inflation really is under control; they will lead, other things being equal, to higher stock prices and lower mortgage rates.So we can expect howls from Trump and his allies that politics, not economics, is driving the coming rate cuts — even though Trump himself appointed Jerome Powell, the Fed’s chair.Why do we know this will happen? Partly because paranoia is MAGAworld’s normal condition: It sees sinister conspiracies everywhere.Beyond that, Trump and his allies constantly engage in projection, assuming that their opponents are doing or will do what they themselves would do or have done, like weaponizing the Justice Department for Trump’s own political ends.And when it comes to interest rate policy, Trump has a track record of doing exactly what I’m sure he will accuse Biden of doing: trying to manipulate the Fed. Ever since Richard Nixon pressured the Fed to keep rates low in 1972, possibly helping to set the stage for the stagflation that followed, it has been traditional for the White House to respect the Fed’s independence. But in 2019 Trump attacked Powell and his colleagues as “boneheads” and demanded that they cut interest rates to “ZERO, or less.”So we know that Trumpist attacks on the Fed for cutting interest rates are coming. What we don’t know is how the Fed will react.In a recent dialogue with me about the economy, my colleague Peter Coy suggested that the Fed may be inhibited from cutting rates because it’ll fear accusations from Trump that it’s trying to help Biden. I hope Fed officials understand that they’ll be betraying their responsibilities if they let themselves be intimidated in this way.And I hope that forewarned is forearmed. MAGA attacks on the Fed are coming; they should be treated as the bad-faith bullying they are.The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: letters@nytimes.com.Follow the New York Times Opinion section on Facebook, Instagram, TikTok, X and Threads. More

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      Will the Economy Help or Hurt Biden ’24? Krugman and Coy Dig Into Data.

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      Peter Coy: Paul, I think the economy is going to be a huge problem for President Biden in 2024. Voters are unhappy about the state of the economy, even though by most measures it’s doing great. Imagine how much unhappier they’ll be if things get worse heading into the election — which I, for one, think is quite likely to be the case.Paul Krugman: I’m not sure about the politics. We can get into that later. But first, can we acknowledge just how good the current state of the economy is?Peter: Absolutely. Unemployment is close to its lowest point since the 1960s and inflation has come way down. That’s the big story of 2023. But 2024 is a whole ’nother thing. I think there will be two big stories in 2024. One, whether the good news continues, and two, how voters will react to whatever the economy looks like around election time.Paul: Right now many analysts, including some who were very pessimistic about inflation last year, are declaring that the soft landing has arrived. Over the past six months the core personal consumption expenditures deflator — a mouthful, but that’s what the Federal Reserve targets — rose at an annual rate of 1.9 percent, slightly below the Fed’s 2 percent target. Unemployment is 3.7 percent. The eagle has landed.Peter: I question whether we’ve stuck the soft landing. I do agree that right at this moment things look really good. While everyone talks about the cost of living going up, pay is up lately, too. Lael Brainard, Biden’s national economic adviser, points out that inflation-adjusted wages for production and nonsupervisory workers are higher now than they were before the Covid pandemic.So let’s talk about why voters aren’t feeling it. Is it just because Biden is a bad salesman?Paul: Lots of us have been worrying about the disconnect between good numbers and bad vibes. I may have been one of the first people to more or less sound the alarm that something strange was happening — in January 2022! But we’re all more or less making this up as we go along.The most informative stuff I’ve seen recently is from Briefing Book, a blog run by former White House staffers. They’ve tried to put numbers to two effects that may be dragging consumer sentiment down.One effect is partisanship. People in both parties tend to be more negative when the other party controls the presidency, but the Briefing Book folks find that the effect is much stronger for Republicans. So part of the reason consumer sentiment is poor is that Republicans talk as if we’re in a depression when a Democrat is president, never mind reality.Peter: That is so true. And I think the effect is even stronger now than it used to be because we’re more polarized.Paul: The other effect affecting consumer sentiment is that while economists tend to focus on relatively recent inflation, people tend to compare prices with what they were some time in the past. The Briefing Book estimates suggest that it takes something like two years or more for lower inflation to show up in improved consumer sentiment.This is one reason the economy may be better for Democrats than many think. If inflation really has been defeated, many people haven’t noticed it yet — but they may think differently a little over 10 months from now, even if the fundamentals are no better than they are currently.I might add that the latest numbers on consumer sentiment from several surveys have shown surprising improvement. Not enough to eliminate the gap between the sentiment and what you might have expected from the macroeconomic numbers, but some movement in a positive direction.Peter: That makes sense. Ten months from now, people may finally be getting over the trauma of high inflation. On the other hand, and I admit I’m not an economist, I’m still worried we could have a recession in 2024. Manufacturing is soft. The big interest rate increases by the Fed since March 2022 are hitting the economy with a lag. The extra savings from the pandemic have been depleted. The day after Christmas, the Federal Reserve Bank of St. Louis said the share of Americans in financial distress over credit cards and auto loans is back to where it was in the depths of the recession of 2007-9.Plus, I’d say the labor market is weaker than it looked from the November jobs report. (For example, temp-agency employment shrank, which is an early warning of weak demand for labor.)Also, small business confidence remains weak.Paul: Glad you brought up small business confidence — I wrote about that the other week. “Hard” indicators like hiring plans are pretty strong. “Soft” indicators like what businesses say about future conditions are terrible. So small businesses are in effect saying, “I’m doing OK, and expanding, but the economy is terrible” — just like consumers!I’m not at all sure when the Fed will start cutting, although it’s almost certain that it eventually will, but markets are already effectively pricing in substantial cuts — and that’s what matters for the real economy. As I write this, the 10-year real interest rate is 1.69 percent, down from 2.46 percent around six weeks prior. Still high compared with prepandemic levels, but financial conditions have loosened a lot.Could there be a recession already baked in? Sure. But I’m less convinced than I was even a month ago.Peter: The big drop in interest rates can be read two ways. The positive spin is that it’ll be good for economic growth, eventually. That’s how the stock market is interpreting it. The negative spin is that the bond market is expecting a slowdown next year that will pull rates down. Also, what if the economy slows down a lot but the Fed doesn’t want to cut rates sharply because Fed officials are afraid of being accused by Donald Trump of trying to help Biden?Paul: I guess I think better of the Fed than that. And always worth remembering that the interest rates that matter for the economy tend to be driven by expectations of future Fed policy: The Fed hasn’t cut yet, but mortgage rates are already down substantially.Peter: Yes.Paul: OK, about the election. The big mystery is why people are so down on the economy despite what look like very good numbers. At least part of that is that people don’t look at short-term inflation, but at prices compared with what they used to be some time ago — but people’s memories don’t stretch back indefinitely. As I said, the guys at Briefing Book estimate that the most recent year’s inflation rate is only about half of what consumers look at, with a lot of weight on earlier inflation. But here’s the thing: Inflation has come way down, and this will gradually filter into long-term averages. Right now the average inflation rate over the past 2 years was 5 percent, still very high; but if future inflation runs at the 2.4 percent the Fed is now projecting, which I think is a bit high, by next November the two-year average will be down to 2.7 percent. So if the economy stays where it is now, consumers will probably start to feel better about inflation.Peter: Except that perceptions of inflation are filtered through politics. Food and gasoline are more expensive for Trump supporters than Biden supporters, if you believe what people tell pollsters. That’s not going to change between now and November.The Obama-Biden ticket beat the McCain-Palin ticket in 2008 because voters blamed Republicans for the 2007-9 recession. Obama-Biden had a narrower win in 2012 against Romney-Ryan, and I think one factor was the so-called jobless recovery from that same recession. That’s why Biden is supersensitive about who gets credit and blame for turns in the economy.For the record, Trump might be president right now if it hadn’t been for the Covid pandemic, which sent the unemployment rate to 14.7 percent in April 2020. The economy was doing quite well before that happened. A lot of Republicans are nostalgic for Trumponomics, although I think the economy prospered more in spite of him than because of him. Thoughts?Paul: Most of the time, presidents have far less effect on the economy than people imagine. Big stimulus packages like Barack Obama’s in 2009 and Biden’s in 2021 can matter. But aside from pandemic relief, which was bipartisan, nothing Trump did had more than marginal effects. His 2017 tax cut didn’t have much visible effect on investment; his tariffs probably on net cost a few hundred thousand jobs, but in an economy as big as America’s, nobody noticed.Peter: Just speculating, but I wonder if when people say they trust Trump more than Biden on the economy, they’re feeling vibes more than parsing statistics. You know, “We need a tough guy in the White House!”Paul: People definitely aren’t parsing statistics. Only pathetic nerds like us do that. And while Trump wasn’t actually a tough economic leader, he literally did play one on TV.But we don’t really know if that matters, or whether people are still reacting to the shock of inflation and high interest rates, which they hadn’t seen in a long time. Again, the best case for Biden pulling this out is that voters get over that shock, with both inflation and interest rates rapidly declining.Oh, and falling interest rates mean higher bond prices, and often translate into higher stock prices, too — which has also been happening lately.Peter: True, Paul. But cold comfort for people who don’t own stocks and bonds. Or who do own stocks and bonds in their retirement plans but don’t think of themselves as part of the capitalist class. To win in November, Biden and his team are going to need to be perceived as doing something for the working class and the middle class. That’s why you see the White House talking about eliminating junk fees and capping insulin prices.Paul: For what it’s worth, I think a lot of people judge the economy in part by the stock market, even if they don’t have a personal stake. That’s why Trump boasted about it so much, and has lately been trying to say that Biden’s strong stock market is somehow a bad thing.Finally, there are some indications that Democrats in particular are feeling better about the Biden economy. The Michigan survey tracks sentiment by partisanship. The numbers are noisy, but over the past few months Democratic sentiment has been slightly more positive than it was in the months just before the pandemic struck.Peter: Paul, how important do you think the economy will be to voters compared to other issues, such as Trump’s fitness for office, Biden’s age, abortion access, et cetera? I mean, if it’s not important, why are we even having this conversation?Paul: The economy surely matters less than it did when Republicans and Democrats lived in more or less the same intellectual universe — everyone agreed that the economy was bad in 1980 or 2008; now, Dems are fairly positive while Republicans claim to believe that we’re in a severe downturn. But there are still voters on the margin, and weak Democratic supporters who will turn out if they have a sense that things are improving.Peter: Democratic strategists think the election might come down to Pennsylvania and Wisconsin, assuming that Biden holds Michigan and New Hampshire and loses Arizona and Georgia. Any thoughts about the economic outlook for Pennsylvania and Wisconsin?Paul: No strong sense about either state. But one little-noticed fact about the current economy is how uniform conditions are. In 2008, so-called sand states that had big housing bubbles were doing much worse than states that didn’t; now unemployment is low almost everywhere.Of course, all political bets are off if we have a recession. But there’s a reasonable case that the economy will be much less of a drag on Democrats by November, as the reality of a soft landing sinks in.Oh, and my subjective sense is that for whatever reason, media coverage of the economy has turned much more positive lately. I have to think this matters, otherwise, what are we even doing? And until recently, media reports tended to emphasize the downsides — “Great jobs numbers, and here’s why that’s bad for Biden” has become a sort of running joke among people I follow. These days, however, we’re starting to see reports acknowledging that we’ve had an almost miraculous combination of strong employment and falling inflation.Peter: Paul, what economic indicators will you be paying the most attention to in the next few months with regard to the election? I’ll nominate inflation and unemployment, although those are kind of obvious.Paul: Unemployment, for sure. On inflation, I’ll be watching longer-term measures: Will inflation be low enough to bring down two- or three-year averages? And especially highly visible stuff, like groceries. Thanksgiving dinner was actually cheaper in 2023 than in 2022. Will grocery prices be subdued enough to reduce the amount of complaining?Oh, and I’ll be looking at consumer sentiment, which as we’ve seen can be pretty disconnected from the economy but will matter for the election.Peter: Happy New Year!Source photographs by Caroline Purser and Anagramm/Getty ImagesThe Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: letters@nytimes.com.Follow the New York Times Opinion section on Facebook, Instagram, TikTok, X and Threads. More

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      A Christmas Gift From the Bond Market

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      It’s been a strange few days on the Donald Trump front: He said something about himself that I actually believe and something about the economy that’s mostly true.On the personal side, Trump has been sounding a lot like Adolf Hitler lately — I don’t mean his general tone, I mean his specific statement last week at a New Hampshire rally that immigrants are “poisoning the blood of our country,” echoing what Hitler wrote in “Mein Kampf” almost word for word. (And if you think it was just a one-off, he said the same thing in a September interview.) But Trump claims never to have read “Mein Kampf,” and I believe him, just as I believe that he’s barely skimmed the Bible or any of the great books or, I would guess, “The Art of the Deal.” Pretty clearly, reading isn’t his thing.What’s happening, presumably, is that Trump talks to people who have read Hitler, approvingly, and that’s how Nazi language gets into his speeches. Are you reassured?On the economic side, the stock market has recently been close to record highs, but Trump has dismissed these gains as just making “rich people richer.”We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber?  More

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      The Stock and Bond Markets Are Getting Ahead of the Fed.

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      Stock and bond markets have been rallying in anticipation of Federal Reserve rate cuts. But don’t get swept away just yet, our columnist says.It’s too early to start celebrating. That’s the Federal Reserve’s sober message — though given half a chance, the markets won’t heed it.In a news conference on Wednesday, and in written statements after its latest policymaking meeting, the Fed did what it could to restrain Wall Street’s enthusiasm.“It’s far too early to declare victory and there are certainly risks” still facing the economy, Jerome H. Powell, the Fed chair, said. But stocks shot higher anyway, with the S&P 500 on the verge of a record.The Fed indicated that it was too early to count on a “soft landing” for the economy — a reduction in inflation without a recession — though that is increasingly the Wall Street consensus. An early decline in the federal funds rate, the benchmark short-term rate that the Fed controls directly, isn’t a sure thing, either, though Mr. Powell said the Fed has begun discussing rate cuts, and the markets are, increasingly, counting on them.The markets have been climbing since July — and have been positively buoyant since late October — on the assumption that truly good times are in the offing. That may turn out to be a correct assumption — one that could be helpful to President Biden and the rest of the Democratic Party in the 2024 elections.But if you were looking for certainty about a joyful 2024, the Fed didn’t provide it in this week’s meeting. Instead, it went out of its way to say that it is positioning itself for maximum flexibility. Prudent investors may want to do the same.Reasons for OptimismOn Wednesday, the Fed said it would leave the federal funds rate where it stands now, at about 5.3 percent. That’s roughly 5 full percentage points higher than it was in early in 2022. Inflation, the glaring economic problem at the start of the year, has dropped sharply thanks, in part, to those steep interest rate increases. The Consumer Price Index rose 3.1 percent in the year through November. That was still substantially above the Fed’s target of 2 percent, but way below the inflation peak of 9.1 percent in June 2022. And because inflation has been dropping, a virtuous cycle has developed, from the Fed’s standpoint. With the federal funds rate substantially above the inflation rate, the real interest rate has been rising since July, without the Fed needing to take direct action.But Mr. Powell says rates need to be “sufficiently restrictive” to ensure that inflation doesn’t surge again. And, he cautioned, “We will need to see further evidence to have confidence that inflation is moving toward our goal.”The wonderful thing about the Fed’s interest rate tightening so far is that it has not set off a sharp increase in unemployment. The latest figures show the unemployment rate was a mere 3.7 percent in November. On a historical basis, that’s an extraordinarily low rate, and one that has been associated with a robust economy, not a weak one. Economic growth accelerated in the three months through September (the third quarter), with gross domestic product climbing at a 4.9 percent annual rate. That doesn’t look at all like the recession that had been widely anticipated a year ago.To the contrary, with indicators of robust economic growth like these, it’s no wonder that longer-term interest rates in the bond market have been dropping in anticipation of Fed rate cuts. The federal funds futures market on Wednesday forecast federal funds cuts beginning in March. By the end of 2024, the futures market expected the federal funds rate to fall to below 4 percent.But on Wednesday, the Fed forecast a slower and more modest decline, bringing the rate to about 4.6 percent.Too Soon to RelaxSeveral other indicators are less positive than the markets have been. The pattern of Treasury rates known as the yield curve has been predicting a recession since Nov. 8, 2022. Short-term rates — specifically, for three-month Treasuries — are higher than those of longer duration — particularly, for 10-year Treasuries. In financial jargon, this is an “inverted yield curve,” and it often forecasts a recession.Another well-tested economic indicator has been flashing recession warnings, too. The Leading Economic Indicators, an index formulated by the Conference Board, an independent business think tank, is “signaling recession in the near term,” Justyna Zabinska-La Monica, a senior manager at the Conference Board, said in a statement.The consensus of economists measured in independent surveys by Bloomberg and Blue Chip Economic Indicators no longer forecasts a recession in the next 12 months — reversing the view that prevailed earlier this year. But more than 30 percent of economists in the Bloomberg survey and fully 47 percent of those in the Blue Chip Economic Indicators disagree, and take the view that a recession in the next year will, in fact, happen.While economic growth, as measured by gross domestic product, has been surging, early data show that it is slowing markedly, as the bite of high interest rates gradually does its damage to consumers, small businesses, the housing market and more.Over the last two years, fiscal stimulus from residual pandemic aid and from deficit spending has countered the restrictive efforts of monetary policy. Consumers have been spending resolutely at stores and restaurants, helping to stave off an economic slowdown.Even so, a parallel measurement of economic growth — gross domestic income — has been running at a much lower rate than G.D.P. over the last year. Gross domestic income has sometimes been more reliable over the short term in measuring slowdowns. Ultimately, the two measures will be reconciled, but in which direction won’t be known for months.The MarketsThe stock and bond markets are more than eager for an end to monetary belt-tightening.Already, the U.S. stock market has fought its way upward this year and is nearly back to its peak of January 2022. And after the worst year in modern times for bonds in 2022, market returns for the year are now positive for the investment-grade bond funds — tracking the benchmark Bloomberg U.S. Aggregate Bond Index — that are part of core investment portfolios.But based on corporate profits and revenues, prices are stretched for U.S. stocks, and bond market yields reflect a consensus view that a soft landing for the economy is a near-certain thing.Those market movements may be fully justified. But they imply a near-perfect, Goldilocks economy: Inflation will keep declining, enabling the Fed to cut interest rates early enough to prevent an economic calamity.But excessive market exuberance itself could upend this outcome. Mr. Powell has spoken frequently of the tightening and loosening of financial conditions in the economy, which are partly determined by the level and direction of the stock and bond markets. Too big a rally, taking place too early, could induce the Fed to delay rate cuts.All of this will have a bearing on the elections of 2024. Prosperity tends to favor incumbents. Recessions tend to favor challengers. It’s too early to make a sure bet.Without certain knowledge, the best most investors can do is to be positioned for all eventualities. That means staying diversified, with broad holdings of stocks and bonds. Hang in, and hope for the best. More

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      The Fed’s Decisions Now Could Alter the 2024 Elections

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      The state of the economy will affect voting next November, and the Federal Reserve may find itself in a delicate position, our columnist says.What’s happening in the economy now will have a big effect — perhaps, a decisive one — on the presidential election and control of Congress in 2024.To a remarkable extent, the economy is what matters to voters, so much so that one long-running election model relies on economic data to produce accurate predictions without even considering the identities, personalities, popularity or policies of candidates, or the strategies, messaging or dirty tricks of their campaigns.Right now, that model, created and run by Ray Fair, a Yale economist, shows that the 2024 national elections are very much up for grabs.The economy is strong enough for the incumbent Democrats to win the popular vote for the presidency and Congress next year, Professor Fair’s projections find. But it’s not a slam dunk. Persistent — though declining — inflation also gives the Republicans a reasonable chance of victory, the model shows. Both outcomes are within the model’s margin for error.It means small shifts in the economy could have an outsize influence on the next elections. That could put the Federal Reserve in a hot spot, even if the central bank tries to avoid it.The Fed strives to be independent. But policymakers’ decisions over the next 12 months could conceivably decide the elections.The Fair ModelProfessor Fair’s pioneering U.S. elections model does something that was fairly radical when he created it in the 1970s.It analyzes politics without really considering politics.Instead, Professor Fair focuses on economic growth, inflation and unemployment. With a few tweaks through the years, he has used economics to analyze elections since 1978, based on data for elections going back to 1916.What he’s found is that the economy sets the climate for national elections. The candidates and the political parties must live within it.Professor Fair makes his econometric models available on his website as teaching tools.“I encourage people to plug in their own assumptions and see how that will change the outcome,” he said.Professor Fair doesn’t even try to predict final election results. Just for a start, he doesn’t do state-by-state tallies or electoral college projections, or examine the potential impact of third-or fourth-party candidacies.But what his model does extremely well is provide a standard, historically based framework for understanding economic effects on the popular vote for the two main American political parties.What the model is showing is that the economy’s surprisingly strong growth and low unemployment since the start of the Biden presidency have already helped the incumbents considerably, while the uncomfortably high inflation levels during the period have helped the Republicans. Based on the history embedded in the model, if these critical economic factors shift, there’s room for a decisive change in the popular vote. But probably not much room.The Inflation EffectThere was jubilation on Wall Street over the past week over the positive news about inflation. The overall Consumer Price Index for October dropped to 3.2 percent annually from 3.7 percent the previous month — and from a peak, in this business cycle, of 9.1 percent in June 2022. At the same time, core inflation, which excludes fuel and food prices, fell to 4 percent in October, the smallest increase since September 2021.Inflation is still running well above the Fed’s target of 2 percent, but it’s declining, and traders are assuming that, at the very least, Fed officials won’t need to raise interest rates at their next meeting, in December. And there’s more.The Wall Street consensus, which is captured by the futures market, is that further encouraging inflation news will be coming, and that the Fed will start lowering rates by the spring. The sooner the Fed acts, this thinking goes, the more likely it is that a significant increase in unemployment — and a full-blown recession — can be avoided.There are political implications.Because interest rate cuts have lagged effects on the economy, the sooner such cuts occurred, the more likely it would be that the economy surged before next year’s election. An increase in economic growth in the first nine months of an election year — without a spike in unemployment — would help the presidential incumbent’s party, Professor Fair’s model shows. (If Republicans controlled the White House now, strong economic growth would help them more than it does the Democrats, history and the Fair model suggest.)On the other hand, a decline in inflation won’t help the Democrats much at this stage, Professor Fair said, because high inflation has already been baked into the vote prediction — and, presumably, into voters’ consciousness. The model averages the first 15 quarters — or 45 months — of a presidential administration, and we are already in the 11th quarter of the Biden presidency.For the overall inflation effect to diminish considerably, the basic math requires actual sustained deflation — a continuing fall in prices — in the months ahead. Historically, that has only happened during major economic declines, accompanied by soaring unemployment, as was the case in the Great Depression. A major recession would probably mean a Democratic debacle next year.A Looming NightmareBut a major recession in the next 12 months is not the consensus view among economists or in financial markets.Instead, a more benign prospect beckons. The probability of a “soft landing” — a decline in inflation without a recession — has grown in most forecasters’ estimations.But for the political outlook and for the Fed, the timing is tricky.A growth surge that is not accompanied by a big increase in unemployment would help the incumbent party, and large rate cuts by the Fed might well set off more economic growth. But the Fed will be reluctant to start reducing interest rates while inflation is still above 3 percent. Instead, as long as inflation is high, the Fed has vowed to keep interest rates “higher for longer,” and, in effect, it already has.Since July, short-term rates have stayed above 5.25 percent, mortgage rates are still above 7.5 percent and consumer borrowing is straitened. The longer this goes on, the greater the chances of a calamity in the financial system. Yet if the Fed eases interest rates too soon, and sets off another wave of inflation, the damage to its already tarnished reputation as an effective inflation-fighter would be severe.So the Fed is in a difficult spot. If the central bank doesn’t start to lower interest rates by the summer, it could be reluctant to do so at all in the autumn, because it would inevitably be seen as taking a partisan stance.As Ian Shepherdson, chief economist of the research firm Pantheon Macroeconomics, said in an online discussion, “there’s a lot hanging on the timing” of the inflation data in the weeks ahead. If the inflation issue isn’t resolved soon, he said, we will have to deal with “the nightmare of whether the Fed wants to be starting a shift in the policy cycle as the election approaches.”Incumbent presidents always want the economy to look great on Election Day. The one case in which it is well documented that a president put pressure on a Federal Reserve chairman to cut rates — and the central bank did so — involved President Richard M. Nixon and Arthur F. Burns in late 1971 and 1972. Mr. Nixon didn’t limit his improper actions to browbeating the Fed. There was also the Watergate break-in at the Democratic National Committee headquarters, and the subsequent cover up. An investigation revealed the secret White House taping system — which recorded Mr. Nixon’s rough treatment of Mr. Burns.But there is substantial evidence of other instances of presidents and their emissaries trying to influence the Fed, without success. President Donald J. Trump repeatedly berated the current Fed chair, Jerome H. Powell, for not lowering rates sufficiently. President Lyndon B. Johnson bullied William McChesney Martin to the point of physically manhandling him. And Paul Volcker revealed that, in President Ronald Reagan’s presence, James Baker, the chief of staff, told Mr. Volcker that the president “wants to give you an order”: Don’t raise rates as the 1984 election approaches. Mr. Volcker said Mr. Reagan looked on silently.In an oral history, Mr. Volcker said the meeting occurred in the White House library, not the Oval Office, probably to protect the president. “Whatever taping machines they had were probably not in the library,” Mr. Volcker said. “I didn’t want to say that we were going to raise rates,” Mr. Volcker recalled, “because we weren’t so as near as I can recall, I said nothing.”Mr. Powell has said he considers Mr. Volcker to be a role model. Generous and forthcoming in private conversations, Mr. Volcker was sometimes taciturn in public. It will be wise to emulate that reticence at critical moments in the months ahead.The Fed needs to be seen as independent and tough, and to squelch inflation, as Mr. Volcker did. Then, quite likely, it will need to cut rates aggressively to help the economy.The calendar may not cooperate. The tougher the Fed is now, the more delicate its position will become as the election approaches. More

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      Global Markets Cheer on Better Than Expected Inflation Data

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      A better-than-expected Consumer Price Index report triggered a big surge in stocks and bonds, as investors bet that interest rates will begin to fall.Upbeat investors see Tuesday’s inflation data as a possible turning point in the Fed’s battle against soaring prices.Michael M. Santiago/Getty ImagesGood news for global markets Yesterday’s impressive rally in U.S. stocks and bonds has gone worldwide this morning, as investors see central banks making gains in their fight against inflation. Adding to the good news was a breakthrough in the House last night that could avert a government shutdown.S&P 500 futures signal further gains at the opening bell. The question now is whether this represents a false dawn on inflation, or the start of a durable decline in rising costs — and interest rates.Here’s what’s exciting investors: Yesterday’s cooler-than-expected Consumer Price Index data has shifted discussion in the markets from potential interest rate hikes to cuts, and what that might mean for stocks. President Biden, whose poll ratings have been hurt by inflation, also cheered the numbers.Other promising data points came out this morning. Inflation in Britain fell to its lowest level in two years. And consumer spending and industrial output in China rebounded last month, a hopeful sign for the world’s No. 2 economy.Market optimists have moved up their bets on rate cuts. Futures markets this morning pointed to the Fed starting to lower borrowing costs by May, sooner than previous estimates of closer to the end of 2024.Less aggressive is Mohit Kumar, the chief financial economist at Jefferies, who wrote today that big rate cuts would begin after the presidential election next year. Jefferies predicts the Fed’s prime lending rate going to 3 percent by the end of 2025 from its current level of 5.25 to 5.5 percent.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.We are confirming your access to this article, this will take just a moment. However, if you are using Reader mode please log in, subscribe, or exit Reader mode since we are unable to verify access in that state.Confirming article access.If you are a subscriber, please  More

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      For Turkey, Erdogan Victory Brings More Risky Economic Policy

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      The Turkish lira has hit a new low, and analysts see few improvements ahead as re-elected President Erdogan pursues unconventional economic policies.Since winning re-election, President Recep Tayyip Erdogan of Turkey has publicly doubled down on his idiosyncratic economic policies.“If anyone can do this, I can do it,” he declared in a victory speech last Sunday, referring to his ability to solve the country’s calamitous economic problems.His brash confidence is not widely shared by most analysts and economists.The Turkish lira dropped to a record low against the dollar this week, and foreign investors have been disheartened by the president’s refusal to stray from what is widely considered to be an eccentric economic course.Instead of combating dizzying inflation by raising interest rates and making borrowing more expensive — as most economists recommend — Mr. Erdogan has repeatedly lowered rates. He argues that cheap credit will boost manufacturing and exports.But his strategy is also fueling inflation, now running at an annual rate of 44 percent, and eroding the value of the Turkish lira. Attempts by the government to prop up the faltering currency have drained the dwindling pool of foreign reserves.As the lira’s value drops, the price of imported goods — like medicine, energy, fertilizer and automobile parts — rises, making it more expensive for consumers to afford daily costs. And it raises the size of debt payments for businesses and households that have borrowed money from foreign lenders.The national budget is also coming under increasing strains. The destructive earthquakes in February that ripped up swaths of southern Turkey are estimated to have caused more than a billion dollars in damage, roughly 9 percent of the country’s annual economic output.At the same time, Mr. Erdogan went on a pre-election spending spree to attract voters, increasing salaries for public sector workers and payouts for retirees and offering households a month of free natural gas. The expenditures pushed up growth, but economists fear that such outlays will feed inflation.President Erdogan in Istanbul last month. Foreign investors have been disheartened by his refusal to stray from what is widely considered to be an eccentric economic course.Sergey Ponomarev for The New York TimesAn effort to encourage Turks to keep their savings in lira by guaranteeing their balances against currency depreciations further adds to the government’s potential liabilities.Critics of the president’s economic approach were somewhat heartened by reports that Mr. Erdogan is expected this weekend to appoint Mehmet Simsek, a former finance minister and deputy prime minister, to the cabinet. Mr. Simsek is well thought of in financial circles and has previously supported a tighter monetary policy.“What Turkey really needs now is more exports and more foreign direct investment, and for that you have to send a signal,” said Henri Barkey, an international relations professor at Lehigh University. One signal could be Mr. Simsek’s appointment, he said.Mr. Barkey argues that Mr. Erdogan will have no choice but to make a U-turn on policy by winter, when energy import costs rise and some debt payments are due.Others are more skeptical that Mr. Erdogan will back down from his insistence that high interest rates fuel inflation. Kadri Tastan, a senior fellow at the German Marshall Fund, a public policy think tank based in Brussels, said that regardless of the cabinet’s makeup, he didn’t believe a policy turnaround was imminent.“I’m quite pessimistic about an enormous change, of course,” he said.To deal with the large external deficit and depleted central bank reserves, Mr. Erdogan has been relying on allies like Russia, Qatar and Saudi Arabia to help bolster its reserves by depositing dollars with the central bank or extending payment deadlines and discounts for imported goods like natural gas.In a note to investors this week, Capital Economics wrote that any optimism about a policy shift is likely to be short-lived: “While policymakers like Simsek would probably pursue more restrained fiscal policy than we had envisaged, we doubt Erdogan would give the central bank license to hike policy rates to restore balance to the economy.”Turkey’s more than $900 billion economy makes it the eighth largest in Europe. And Mr. Erdogan’s efforts to position himself as a power broker between Russia and the European allies since the war in Ukraine began has further underscored Turkey’s geopolitical influence.Mr. Erdogan, who has been in power for two decades, built his electoral success on growth-oriented policies that lifted millions of Turks into the middle class. But the pumped-up expansion wasn’t sustainable.As the lira’s value drops, the price of imported goods rises.Sergey Ponomarev for The New York TimesThe borrowing frenzy drove up prices, spurring a cost-of-living crisis. Still, Mr. Erdogan persisted in lowering interest rates and fired central bank chiefs who disagreed with him. The pandemic exacerbated problems by reducing demand for Turkish exports and limiting tourism, a large source of income.Mr. Erdogan is likely to keep up his expansionary policies until the next local elections take place next year. Until then, Hakan Kara, the former chief economist of the Central Bank of Turkey, said the country would probably just “muddle through.”“Turkish authorities will have to make tough decisions after the local elections, as something has to give in eventually,” Mr. Kara said. “Turkey has to either switch back to conventional policies, or further deviate from the free market economy where the central authority manages the economy through micro-control measures.”“In either case,” he added, “the adjustment is likely to be painful.” More