Can The Fed Raise Rates In An Election Year?

Tyler Durden's picture

Via BofAML's US Economics Team,

Experience and independence both say “yes”

A popular view among some market participants is that the Fed is unlikely to hike in a presidential election year. While many economic and market factors may influence when and how often the Fed hikes in the upcoming months, we do not expect the timing of US elections to play any meaningful role in the Fed’s policy deliberations. Neither historical experience during the past several hiking cycles, nor the Fed’s own desire for policy independence, suggests this will act as any constraint on the hiking cycle. Rather, we expect the Fed to gradually tighten policy in a data dependent manner during 2016 — regardless of how the political winds may blow.

Recent history: most hikes during election years

Historically, presidential election years have not precluded policy tightening by the Fed. Of the last five Fed hiking cycles, four either began during or continued into an election year. Two of these — 1988 and 2004 — started in an election year, some months before Election Day (in March and June, respectively). Two others — 1983 and 1999 — began the year before an election, with hikes continuing well into the following year. Both these hiking cycles stopped before Election Day (in August and May, respectively), perhaps fueling speculation about the Fed’s motives. But the Fed did not resume hiking once Election Day passed — in contrast to what one should expect if the Fed were temporarily holding back hikes around an election. Rather, each of these tightening cycles concluded as the Fed returned rates to a more neutral stance.

Guarded independence

Is past performance a good predictor of future policy? Given how strongly independence is held at the Fed, we suspect it is. Numerous studies show that politically independent central banks deliver the best inflation and growth outcomes, and Fed officials know that even the perception of political influence can undermine their best intentions. Rather than trying to avoid being news by keeping policy unchanged in an election year, the best strategy would be to move in a very deliberate, well-communicated and datadependent way — one that not only has nothing to do with the political cycle, but wouldn’t even give that impression. Indeed, if the Fed really wanted to minimize political pressure today, it is not at all obvious if the better choice would be to hike to appease its most vocal Congressional critics or to stand pat. Any action or inaction is bound to upset (at least) one party — so why even try?

Unlikely variations on an unlikely theme

Finally, the view that the Fed cannot or will not hike in an election year yields some unlikely implications for monetary policy. One is that the Fed has to get going very soon — and perhaps somewhat aggressively front-load rate hikes — in anticipation of sitting on its hands for some time. In contrast, Fed officials have warned that they don’t want to hike prematurely, and they have emphasized both a data dependent and gradual approach to normalizing policy. Another variation is that if the Fed delays this year, they won’t be able to lift off for nearly another year — and thereby put policy significantly “behind the curve.” But it’s hard to believe the Fed would choose to wait that long and potentially let inflation get out of control because of politics; recent speeches note the risks of hiking too late. In the end, while several factors could potentially delay Fed rate hikes, we very much doubt next year’s presidential election will be one of them.  

The market appears to agree...

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RopeADope's picture

Only a bobblehead still talks about raising rates.

Captain Debtcrash's picture
Captain Debtcrash (not verified) RopeADope Oct 7, 2015 11:00 AM

Of course they can, it would cause a crisis, and once the politicians are pissing their pants, there will be no opposition to helicopter money, banning cash, the E Dollar or whatever else they want to pull. 

Nenad's picture

Obama will not finish his second term! Banned independent documentary reveals the truth. This will scare millions! Current Events Linked to Ancient Biblical Prophecy!

venturen's picture

Date   Probability of Move

2015    0%

2016    0%

2017    0%

2018    0%

2020    0%

2021    0%


knukles's picture

A bazillion years ago we did a little study to frost our equity manager breathren's jets about not raising rates during election cycles.  At the time, the data clearly showed that the Fed was as likely to raise rates as to keep them steady or ease; ie, no correlation!

williambanzai7's picture

I believe we have been through this four years ago...

two hoots's picture

Maybe:  Should we have a presidential election during the Fed’s deliberation?  Who’s Who?  


Dr. Engali's picture

The question should be: Can the fed raise rates in a meaningful way ever again? And the answer is a resounding NO. Next up...;NIRP.

Bay Area Guy's picture

Agree completely with you Doc.

I had the misfortune of flipping through channels the other day when that little British twit Simon Somebody was on CNBS trying to drum up support for a rate increase so that, and I kid you not, "the Fed would have ammunition to combat the recession".

What passes for journalism today is sorely lacking, to put it mildly.

pods's picture

Sure they can. Just not this next one.

Or any after that.

But they could, if they really want to!  They are all powerful.


NoDebt's picture

Hope springs eternal.

Grandad Grumps's picture

My recollection of the recent past is that the outgoing party like to leave the biggest bad of shit possible on the doorstep of the incoming party...

... while at the same time accomplishing the work of the banks and their masters.

Haole's picture

If they hike, we'll know they wanted to blow it all up...

Otherwise, you funny BofAML's US Economics Team.

RopeADope's picture

What is funny is how no one wanted to put their name to that piece of 'analysis'.

carbonmutant's picture

Can the current administration hold off a rate hike?

Has the rate hike been timed for the next adminstration all along?

JPMorgan's picture

Yeah they could and may still before the end of the year to save some face.

Not that anyone thinks they are ineffective chicken shits that talk too much and do very little.

the grateful unemployed's picture

if you said in 2007 that something like a rate hike would be the Feds main business in 2008 you would have missed it by a mile. the election cycle and the stock market cycle are now the same, the buyers aren't sure who they want for president and they take their chips off the table. this stock market is pumped up on steroids, and somebody is about to ask them to pee in the cup. it won't be nice, and a 1/4 point rate hike will not be the news.

yogibear's picture

No. They'll never raise rates until there is a currency crisis.

EddieLomax's picture

Can the Fed raise rates appears to have the answer of a resounding no.

If even a meaningless 0.25% is too much to bear while conditions are as good as they get, then a hike when there is the uncertainty of an election and likely worse economic conditions appears a very low probability.  I think the fed will only raise rates when they are forced to, the only event I can picture being when things have spun out of control and the credibility of the currency is at risk, that seems extreme, but perhaps I lack the imagination to see how else it can occur.

IntercoursetheEU's picture

Can Janet Yellen remember her name yet?

yogibear's picture

Slowly people are starting to figure out the Fed cannot raise rates unless forced by the market.

It's just been a bluff to make people think we are still in a recovery.

venturen's picture

my question is how many suitcases of cash Obama will have when he leaves the whitehouse....he is going to be movin on up!

Crocodile's picture

Who says he is leaving; don't assume in this environment?  The Biden/Obama ticket with Biden taking one for the elite and you have Obama or just crown him "King" and skip any elections; they do not count anyway.

Falling Down's picture

Remember, the Fed is not a political tool:

So says Lizzie "Pocahantas" Warren.




Crocodile's picture

BofAML does not expect the timing of US elections to play any meaningful role in the Fed’s policy deliberations. - end


hehehehehahahaheheh wink-wink

Aussiekiwi's picture

yes thats freaking hilarious!!