Economic Commentary

Is the Fed about to do something unprecedented?

With the Federal Reserve (Fed) on the precipice of changing monetary policy, many clients have recently asked us, “Has the Fed ever raised/cut their target rate during an election year?”, and “Has the Fed ever made a change this close to the election?”.

What happened

In the presidential election years going back to 1956, the Federal Reserve has changed its target rate 15 of the 17 times, or 88%. The two exceptions were in 2012, when rates were effectively zero, and 2016, although the Fed had hiked by a quarter point (0.25%) in December 2015.

The average change for all 15 moves was 0.17%, though it ranges from hikes of more than 5% during 1980 to cuts totaling 3.50% during the Great Financial Crisis in 2008. Furthermore, the Fed has made changes 10 times within the last 90 days of the vote, or 59% of the election years.

About those two exceptions…

The two exceptions when the Fed left monetary policy unchanged during an election year were in 2012 and 2016, which were in the aftermath of the Great Financial Crisis. During a seven-year period from 2008 until December 2015, the Fed kept the target rate in a range from 0.00% to 0.25%, or effectively zero. The economy was struggling, with gross domestic product (GDP) averaged less than 1.5% over that span. Moreover, the unemployment rate averaged 7.6% and the Consumer Price Index averaged just 1.7% annually.

Then, in December 2015 under then-Chair Janet Yellen, the Fed began the process of slowly normalizing rates by increasing the target range from 0.25% to 0.50%. Alas, it would take more than a year before the Fed was comfortable enough to raise rates again, in February 2017.

Our take & bottom line

Contrary to popular belief, the Fed has a long history of adjusting monetary policy – in both directions – during an election year, having done so in 88% of the past election years. Furthermore, it has even done so in the final months of the election, if needed.

In our view, managing monetary policy is challenging in the best of times and extremely difficult in times of crisis. Frankly, it’s always much harder than it looks. Accordingly, the Fed will adjust policy if conditions warrant a change.