Two upcoming events are on the top of investors’ minds, the November 8 presidential election and the possibility of a Federal Reserve (Fed) rate hike, which leads us to ask, how often does the Fed raise rates either shortly before or after an election?
The answer, at least since 1972, is not very often. The Fed has adjusted rates ahead of an election, but most of the historical moves have been rate decreases. The chart below shows that in the two months leading up to the last 11 presidential elections, the Fed has lowered rates in four years and has increased them in only two.
Markets are only pricing in an 8% chance of a rate hike at the Fed’s pre-election meeting (November 1-2), which seems to fit with the historical pattern of rate hikes being rare immediately before an election. However, markets are pricing in a nearly 70% chance of a hike at the Fed’s December meeting, which also seems to be a better fit with history.
Historically, the Fed has raised rates during the two months after an election in five years, though it also lowered them in five years. Interestingly, two of those years included both. In the late 1970s and early 1980s, the Fed was dealing with runaway inflation and was therefore much more active with rate moves than it generally is now.
The recent historical record shows that the Fed has been largely apolitical. When rates have been moved around an election, the focus was on the state of the economy, and we believe that will be the case with the upcoming election as well. However, just for fun we thought it would be interesting to take a look at whether the political leaning of a Fed Chair has had any impact on presidential elections. As the chart above shows, five out of the six times when there was a move in the fed funds rate leading up to an election, the Fed Chair’s own party lost. The only exception was 2004, when Alan Greenspan, who was originally appointed by Reagan, raised rates, and George W. Bush (the Republican incumbent) won the election. Those worried about the Fed’s influence on the upcoming election can rest easy knowing that even if we make the implausible assumption that the Fed tries to influence elections, its track record of succeeding would be terrible.