There has been a lot of talk that the Federal Reserve could hold back on raising interest rates because this is an election year, but according to their past actions, elections do not really matter.
The fear is that a rate hike could create unwanted political reverberations which could be legitimate if it wasn’t for the fact that the Federal Reserve is suppose to be independent. By law, the Fed’s monetary policy decisions do not need to be ratified by the President or Congress. Therefore logistically, the Fed should not be sensitive to the political environment, let alone succumb to political pressure. With President George W. Bush having already served 2 terms as President, he is not up for reelection, which reduces his inclination to meddle with the decisions made by the Federal Reserve.
On top of that rates HAVE been raised during election years. Over the past 4 decades, there have been 10 elections not including the upcoming one. In 6 out of the past 10 elections, rates were increased at one point or another during the election year. For example in 2004, when George W Bush was up for reelection, interest rates were 1% in January 2004 and at 2.25% by December. In 1988 during Reagan’s first election, interest rates were tightened from 14% to 20%.
Here is a more comprehensive list of moves made by the Federal Reserve during election years:
As you can see, an election year almost has no bearing on whether the Federal Reserve will raise interest rates. If it does, then there may be an even bigger problem at hand, which is the independence of the central bank. The Fed’s job is focus on economics and not politics.
By Kathy Lien, Chief Strategist of DailyFX.com