Potential monetary policy implications from the 2024 election

The 2024 election cycle has arrived, and with it questions about what the election means for the economic outlook. It is worth reviewing what history tells us about Federal Reserve monetary policy decisions in election years. Amidst the election buzz news cycle, the Fed is in its third year of working to smite the strongest bout of inflation in more than 40 years.

Inflation has retreated from its high reached in the summer of 2022, but it has yet to recede all the way back to the Fed’s target of 2%, let alone stay there on a sustained basis. Thus far, the improvement on inflation has come without a material hit to economic growth. Real GDP rose 3.1% over the past year, while nonfarm payrolls have increased by an average of 244K the past 12 months, both comfortably above the previous expansion’s average and most estimates of their longer-run potential pace.

The resilient growth backdrop has stoked concerns that inflation may prove somewhat sticky even as it recedes from the sky-high rates experienced the past couple years. Yet, with monetary policy restrictive by nearly all accounts and the lagged impact on the economy a major source of uncertainty, the risk of recession remains unusually high. As such, the Fed faces a complicated macro environment as it determines its next move.

In addition to these macroeconomic crosswinds, the Fed faces another wrinkle in the outlook: the U.S. presidential election. Chair Powell has faced media inquiries questioning if politics will play any role in the central bank’s decisions this year. His answer steadfastly has remained no. It is likely that the looming election will not play a major role in determining the path of the federal funds rate this year.

There are three potential impacts the U.S. 2024 election cycle could have on monetary policy in 2024: (1) the number of fed funds rate moves; (2) a directional bias to rate moves; and (3) the timing of policy actions.

The historical record can shed light on each of these concerns and suggests that, given the myriad of economic forces with which the central bank must contend, the election is mostly noise. Accordingly, it is expected that the Fed will respond to incoming data, not political influences, as it pursues its dual mandate in 2024.

This is not to say, however, that elections have no impact on the outlook for monetary policy. Changes in the composition of Congress and the White House can lead to inflection points for federal fiscal policy, and, by extension, the outlook for the U.S. economy and monetary policy. Furthermore, the president and Senate play a key role in determining the makeup of the Board of Governors, and this process shapes the intellectual leaders of the central bank.

The 2024 election likely will not be the driving force behind the Fed’s moves at its upcoming meetings, but it will still have important implications for monetary policy in 2025 and beyond.

Created in 1913, the Federal Reserve is an independent government agency, but it is ultimately accountable to the public and its elected officials. The central bank is designed in a way to maintain this public accountability while also protecting Fed officials’ independence to ensure that central bankers are not unduly influenced by political pressures that yield undesirable economic outcomes.

The committee consists of the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. Governors are appointed by the president of the United States and confirmed by the Senate to terms lasting 14 years. The presidents of the twelve regional Reserve Banks are not selected by the U.S. president but rather by the directors of each Reserve Bank. The Federal Reserve is self-funded and does not receive appropriations through the Congressional budget process.

This unique setup helps ensure that the Federal Reserve can focus on achieving the goals set forth by Congress, namely maximum employment and stable prices. That said, like many other government organizations advancing the public interest, there is clearly a political tie to the Federal Reserve. Congress can change the central bank’s mandates anytime, and the selection process for the Board of Governors involves the president and Senate. For example, Chair Powell was initially nominated to the Board by president Obama in 2012. President Trump elevated Powell from Governor to Chair in 2018, and president Biden nominated him for a second term as Chair in 2022.

Reviewing what history tells us about Federal Reserve monetary policy decisions in election years is admittedly a bit tricky. The relevant window to examine the historical record is actually quite short. There are only 19 presidential election cycles post-WWII, and even fewer that are comparable years for the current monetary policy setting environment. The Great Inflation plagued policymakers from 1965 to 1982 and was characterized by “go-stop” policy, which led to volatility in rates and price growth.

Furthermore, the Fed was significantly less transparent before the 1990s. Prior to 1994, it did not announce its policy changes, and it was not until 2000 the Committee issued a statement after each meeting indicating whether it had changed policy or not. Post-meeting press conferences first began in 2011 under Chairman Ben Bernanke and were expanded to every meeting under Chair Powell in 2019.

The first concern to explore is whether monetary policymakers tend to refrain from policy adjustments during election years. The argument goes something like this: in an effort to demonstrate the Fed’s independence and guard against criticism that moves are politically motivated, policymakers may not change its policy rate as much as they otherwise would have. However, in the past 30 years, the Fed has actually moved rates slightly more in presidential election years compared to non-election years, by about 20 basis points more on an absolute basis.

Since 1994, the average number of times the Fed adjusted the fed funds rate each year is nearly identical across election (2.7 instances) and non-election (2.9 instances) years.

A second question to ask is whether the Fed’s policy actions in election years are biased to support a particular candidate, usually the incumbent, who may have appointed/re-appointed the Fed chair and other top Board officials. This suggests a potential bias toward easier policy to lend near-term support to the economy. Indeed, in the seven presidential election years since 1994, the Fed has cut the fed funds target rate by an average of 46 basis points compared to raising the fed funds rate by an average of 25 basis points during non-election years.

However, with so few periods to examine, seven presidential election years and 23 non-election years, it is not surprising that these simple averages are skewed by major economic events. For example, the Fed slashed rates in the presidential election years of 2008 and 2020 as the economy was plunging into recession from a global financial crisis and a global health crisis, respectively. Excluding 2008 and 2020, the Fed has, on average, raised the fed funds rate more in election years compared to non-election years. Fully excluding recession years in the analysis (2001, 2008 and 2020) shows the Fed adjusting the fed funds rate by similar amounts: +45 bps in election years and +48 bps in non-election years. Macroeconomic conditions, rather than the election cycle, seem to dominate the direction of policy moves.

The past 30 years of history suggest that macroeconomic conditions, rather than the election cycle, seem to dominate the direction of monetary policy moves.

The third concern, and the one warrants the most thought, is whether the Fed may adjust the timing of its policy actions this year because of the election. In an effort to avoid the political fray, the Fed may be reluctant to make a significant policy adjustment such as a pivot to cuts when the campaign season is hitting a fever pitch. Looking across election years shows the Fed rarely changes course immediately ahead of voting day. Instead, the Fed has tended to maintain its charted course through the election, whether that be tightening (2004), cutting (2008) or remaining on hold (1996, 2012, 2020).

There are a few exceptions to this pattern. In 2000, the Fed held rates unchanged at the three meetings that preceded the election and for the two meetings following, but then the Fed embarked on a series of rate cuts in early 2001. However, this pivot occurred as the economy started to show early signs of a slowdown, and by March 2001 the U.S. economy was officially in recession. In December 2000, the unemployment rate was a low 3.9%. One year later, it had climbed to 5.7%, illustrating once again that economic conditions seem to dominate Fed decision-making.

Shortly after the 2000 election the Fed pivoted to cutting rates, but this occurred amid a recession that officially began in March 2001. In 2016, after holding rates unchanged for nearly a year, the Fed raised the fed funds target rate by 25 bps at the meeting immediately following the election. A review of the transcript from the pre-election meeting signals that policymakers were reluctant to change course right before the election at a meeting that did not have a press conference and with no pressing economic need to do so. During the November 2, 2016 Fed meeting, then New York Fed President and Vice Chair William Dudley stated in regard to the fed funds rate: “So the lack of urgency implies that there is not a good case for moving at this meeting. To do so with the election a week away, the outcome uncertain, and no scheduled press conference would imply an urgency to move that I just don’t think is consistent with the incoming information or the economic outlook.”

The 2016 episode also highlights that, while the Fed may want to avoid making waves by shifting the path of policy immediately ahead of an election, elections still matter for the fiscal backdrop in which monetary policy must operate. Republicans won control of the House of Representatives, the Senate and the White House in the 2016 election, marking their first period of unified control of Congress and the presidency since 2005-2006. Financial markets reacted sharply in anticipation of potential fiscal policy stimulus delivered through lower taxes. Between the November and December Fed meetings, the S&P 500 rose more than 7%, spreads on corporate bonds tightened and the 10-year Treasury yield rose from 1.8% to 2.5%.

At the Fed meeting immediately following the 2016 election, the fiscal policy outlook and its implications for the economic outlook became a greater point of discussion. A word count of the transcript from the November 2016 Fed pre-election meeting reveals that the word “fiscal” was mentioned 17 times over the two-day meeting. This word count exploded to 212 times at the subsequent meeting in December 2016. It was not just markets that began to recalibrate the outlook to include more expansionary fiscal policy. The Federal Reserve’s staff economists incorporated fiscal policy accommodation into its baseline outlook, and about half of Fed participants assumed more fiscal stimulus in their submitted forecasts for the Summary of Economic Projections.

While the recent historical record suggests that presidential elections have little bearing on the magnitude, direction and timing of Fed policy moves in the lead up to election day, is there reason to believe this cycle may be different? We are skeptical it is, even as politicians on both sides of the aisle seem more vocal lately about what they would like the Fed to do.

The Fed’s delicate balancing act between reducing inflation without causing untoward damage to the jobs market remains. Thus, even if monetary policymakers wanted to help one party over the other, it is not entirely clear which way they should lean. If the Fed were to expedite rate cuts, the jobs market would presumably be stronger ahead of voting day, but so too would inflation, a prominent issue for voters. Delaying rate cuts would likely help to reduce inflation further and mitigate voters’ frustration about the inflation environment, but it could come at the expense of the jobs market, most voters’ means of income.

The forecast for the federal funds rate in 2024 will be dictated primarily by the expectations for economic growth, employment and inflation and the Fed’s reaction to these developments. It seems unlikely that the election will play a major role in driving monetary policy decisions at the five Fed meetings between now and election day. The Fed takes its independence very seriously, and the past 30 years of history suggests that macroeconomic conditions are the dominant force guiding monetary policy.

That said, the outcome of the election will have implications for U.S. monetary policy in 2025 and beyond. The next president will have the opportunity to shape the Fed through appointments to the Board of Governors. Jerome Powell’s term as Chair ends in May 2026, while the four-year terms of Board of Governors Vice Chair Philip Jefferson and Vice Chair of Supervision Michael Barr will also expire during the next administration (in September 2027 and July 2026, respectively). While all three could stay on at the Board of Governors in non-leadership roles, typically Governors depart at the conclusion of their various leadership roles. Governor Adriana Kugler’s term also will expire in 2026. Furthermore, the historical record shows that, once an election has been decided, the Fed takes into account what economic policy initiatives the incoming Congress and president may undertake.

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