For many journalists, covering economics, the issue voters identify as the most important in the coming election, is like playing right field in baseball. It’s a key position but not the most glamorous one on the team.

Reporting on the economy involves confusing things things like the gross domestic product (GDP) or the consumer price index (CPI), statistical measures about as exciting as doing laundry. Most journalists would rather cover the slugfests that characterize U.S. politics, especially when candidates for the White House go on national television to rant about fake stories involving immigrants eating dogs and cats in Ohio!

Yet polls suggest the economy remains the top issue for voters in the coming election, and what happened at the Federal Reserve Wednesday will have a far more immediate impact on voters than the vague economic policies that both candidates for the White House embrace in their campaigns. Both former president Donald Trump and Vice President Kamala Harris tout budgetary game plans containing holes as big as Yankee Stadium. Neither, for instance, detail how they will finance the tax cuts they embrace without increasing the soaring national debt, which has surged under Republican and Democratic administrations over the past decade or two.

Indeed, the decision by Jerome Powell and his six colleagues on the Federal Reserve Board to cut interest rates by one-half percent will impact how much American voters pay to buy everything from cars and homes to the returns they earn on their savings and the interest charges on credit cards. The effects are immediate.

The Fed, its shorthand moniker, is an arcane institution with a language of its own that has veered between legendary secrecy to the more transparent policies the nation’s central bank embraces today.

*Federal Reserve Board Chairman Paul Volcker listens to a question as he appears before the Senate Banking Committee in Washington, D.C., in 1980. Chick Harrity/AP*

Much of my journalistic career was spent in journalism’s not-so-glamorous right field as a financial and economics reporter, mainly at the Chicago Tribune. I can still see the late Fed Chair Paul Volcker sitting behind his large desk in the Fed’s white marble building on Constitution Avenue, twirling a thick cigar in his hand, admitting – off the record, of course -- that he had no idea the huge interest rate increases he had engineered would cause a deep recession that hollowed out factories across the nation.

Yet the devastating impact policies that Volcker pursued in the 1980s demonstrate two things that are relevant today. One is the importance of the independence of the nation’s central bank. The other is the difficulty the Fed faces manipulating interest rates without shoving the economy into a recession, which is what Powell is trying to achieve just as voters head to the polls during a tight election.

The Fed’s initiation of interest rate cuts this week is a drive to avoid a “hard landing,” which is what happened in the 1980s when Volcker jacked up interest rates from nine percent in 1980 to about twenty percent by January 1981. The sharp increase in borrowing costs plunged the economy into a deep and hard recession that drove the unemployment rate to eleven percent. Volcker’s real target wasn’t the rate itself but the inflationary psychology that accompanied it. He worried that consumers would build into their economic assumptions an indelible expectation that future prices would keep rising. By November 1982, prices -- and interest rates -- started to fall, but it took five to seven years before Volcker’s policies would purge the inflationary psychology from the American economic psyche.

Volcker’s policy was reactive. He inherited a slumping economy when he accepted the job as chairman of the Fed, and he responded with unprecedented vigor and discipline. Powell is on the cusp of achieving something different – the “soft landing” approach to economic policy in which rising interest rates triggered by Fed policy slows the economy just enough to lower prices without a recession that would increase unemployment.

A “soft landing” is a rare occurrence in Fed history. Former board chair Alan Greenspan received credit for one when he raised interest rates sharply from three to six percent in 1994 because he perceived the threat of inflation looming on the horizon.

Greenspan increased interest rates seven times between February 1994 and 1995 from three to six percent. Unlike Volcker, the Greenspan economy was not in a recession. The nation was enjoying the longest economic expansion in U.S. history. Greenspan feared the inflationary psychology was about to seduce the American psyche, though, and he acted preemptively, gambling that the strong recovery and an efficient American workforce would not tip the economy into a recession. He was right.

The current economic scenario faced by Powell borrows a bit from both of his predecessors. Like Volcker, outside forces and politics triggered the inflation he is fighting.

The Arab oil price embargo in the late 1970s and President Ronald Reagan’s decisions to cut taxes without a corresponding reduction in spending created the double-digit inflation that plagued Volcker.

Powell is fighting inflation triggered by outside forces, too – the COVID-19 pandemic and subsequent disruptions to the supply chain system the nation relies upon to deliver goods to American shelves. The combination drove the inflation rate from just under two percent in 2020 to about nine percent by 2022, the highest level since the Volcker era.

In his battle against inflation, Powell capitalized on the Volcker’s experience. He and his Fed colleagues jacked up interest rates eleven times between March and July of 2023. The policy cut inflation from a peak of just over nine percent to two-and-one-half percent, just above the Fed’s ideal target. Like Greenspan, Powell kept interest rates high despite signs that the anti-inflationary policed was working, mindful that it takes more time to ease the threat of an inflationary psychology taking hold.

The question now, as we head into a volatile election, is, did Powell wait too long? Will the interest rate increases that he engineered shove the economy into a recession?

The jury is out, but an impending recession looks unlikely. The usual measure of economic trouble – the unemployment rate – remained low and remarkably stable as Powell sharply increased interest rates. Only recently has it crept up to just over four percent, which was higher than when Powell started his anti-inflation drive but still low by historical standards. He says he doesn’t want the jobless rate to go higher. So, expect numerous interest rate cuts in the coming months.

Less clear is the impact the nation’s central banks will have on a volatile political campaign characterized by misinformation and a fanatic toting a gun championed by Trump, his intended target. Volcker’s anti-inflation campaign no doubt helped President Reagan defeat President Jimmy Carter, who had appointed Volcker to head the Fed in 1979. President Ronald Regan reappointed him in 1983 despite criticism from fellow Republicans.

President Bill Clinton expressed frustration with Greenspan’s policies in the 1990s, but he never publicly criticized the Fed chair. Criticism of Fed policy is normally considered bad form.

Nonetheless, President Trump, who appointed Powell as Fed chair, publicly criticized him when he initiated a series of preemptive interest rate increases in 2017 and threatened to fire him in 2018 even though Trump had no power to take such an action.

President Biden, who reappointed Powell, has not criticized him, even though the Fed chair’s actions put a spotlight on inflation, which is one of Trump's major campaign issues.

Indeed, all three Fed chairs succeeded in purging inflation from the economy because of the central bank’s independence from the White House. Under the law, a Fed chief can’t be fired by a president, regardless of how unhappy he is with their tactics to keep the economy moving in the right direction.

With Project 2025, the Heritage Foundation’s blueprint for a second Trump administration should he win the 2024 election, the Federal Reserve Board would be abolished and replaced with a “free banking” system where banks issue their currency. Trump disavows the Project 2025 handbook, but the project, which was created by many Trump allies, remains a Trump tattoo. No matter how hard he scrubs, it won’t go away.

—James O’Shea

James O’Shea is a longtime Chicago author and journalist who now lives in North Carolina. He is the author of several books and is the former editor of the Los Angeles Times and managing editor of the Chicago Tribune. Follow Jim’s Five W’s Substack here.

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Interest Rates and the Election