Submitted by Roger Thomas via Valuewalk.com, [5]
If you’re an observer of the political aspect of the Fed policy, you’re likely aware that central bankers [6] like to stay out of the spotlight. Spotlight creates political pressure, something Fed technocrats publicly dislike.
With this thought in mind, here’s a look at the federal funds rate overlaid with politics.
Question – Before going further, which president would you guess has received the most charity from the Federal Reserve? Meaning, after adjusting for inflation and employment growth (the two factors that theoretically determine the federal funds target interest rate), which president has experienced a very charitable Fed (i.e. keeps interest rates abnormally lower than what the inflation rate and employment growth would predict) and which presidents experienced a tough-willed Fed?
Another way of saying it is – Which presidents needed the Fed’s help and which presidents didn’t?
Here’s a look.
The Federal Funds Rate
First, a look at the federal funds target rate. The black lines represent periods when the rate was declining or steady. The red lines are periods when the Fed was raising rates.
Overall, the target rate generally declined for the first half of the 1980s and then rose to end the 1980s. In the early 1990s, the Fed rate declined, bottoming out in 1994 before the Federal Reserve started raising rates again. The early 2000s saw the Fed lower rates in response to the collapse of the technology bubble, and then raise rates in an attempt to deal with a global housing market bubble [7]. Since the bursting of the housing bubble and the near collapse of the global financial system, the Fed has kept rates near 0%.
The last time the Federal Reserve raised the federal funds target rate was in 2006.
Federal Funds Rate with Presidents
Next, here’s a look at the federal funds rate by president.
Overall, it’s difficult to see any political cycle, likely because two important data points are missing from the graph. The two points are the inflation rate and the employment growth picture.
As John Taylor pointed out more than two decades ago, the Fed’s interest rate [8] can be approximated by movements in the inflation rate and output against its long-run trend.
So, to see which presidents the Federal Reserve thought needed the most help, one would need to adjust the actual federal funds rate for inflation and output conditions. This would give an idea of which presidents the Federal Reserve thought (thinks) needed help.
A Look at the Charitable Fed
With the previous discussion as the background, take one last guess at which president you think the Federal Reserve was most charitable to. Was it Bush I? Perhaps Clinton? Reagan?
Which president needed the most help?
Here’s the results.
(As a note on methodology for technicians, the Taylor rule [9] presented here uses employment growth as a proxy for output, with 2% employment growth as the long-term trend. Both components of the Taylor rule are equally weighted.)
Interestingly, the Fed has been most charitable to Mr. Obama. During his tenure, the Fed has kept interest rates lower by an amazing 4%.
Other the other end, the Fed’s least preferred presidents were Reagan and Bush II. Both presidents saw a Fed much tougher than what inflation and employment would predict.
The Fed Conclusion
In connecting Federal Reserve interest rate policy since the 1950s with inflation and employment conditions, some interesting results materialize.
Of the interesting findings is that the Fed has presidents it wants to be tough on and presidents it likes to show charity to.
In looking at the details,of the past 11 presidents, the Fed has shown the most charity to the sitting president, Mr. Obama.
The charity shown during Obama’s administration is astounding. When adjusting for inflation and employment growth, the Fed has kept to federal funds rate almost 4% below where it should be (based on a forked-Taylor rule).
One of these days Mr. Obama ought to publicly thank Mr. Bernanke and Ms. Yellen [10] for their incredible generosity. He needed the help.
On the other end, the Fed was toughest on Ronald Reagan and Bush I. They apparently didn’t need the Fed’s help.
Overall, a fascinating view of Federal Reserve policy and its connection with politics.
