After a four and a half year gap, the Federal Reserve finally began an easing cycle on Wednesday, lowering the target range for the federal funds rate by 50 basis points to a level between 4.75% and 5.00%. This is the closest the Federal Reserve has taken interest rate action to a US election in nearly half a century.

Data shows that since 1972, except for two election years, the Federal Reserve has taken actions on interest rates in other election years, both raising and lowering them. Specifically, the policy rates were increased in 5 election years and decreased in 6 election years. In most cases, these rate changes were part of a rate hike/cut cycle that started a year or more before the election year.

Therefore, while it is common for the Federal Reserve to adjust interest rates in election years, starting a new rate cut cycle with only 7 weeks left before the election day has only happened twice before - in 1976 and 1984.

What is the relationship with the election results?

Data shows that in the 5 years when interest rates were raised before the election day, the incumbent president or the party in control of the White House won re-election in 4 years.

An exception occurred in 2000, when Vice President Al Gore failed to keep the White House for the Democrats and George W. Bush reclaimed it for the Republicans. During the period from January to the end of October, then Federal Reserve Chairman Alan Greenspan had raised interest rates by 1 percentage point, with the last increase occurring during the June meeting.

At the same time, in the six elections held in years when interest rates were lowered, the incumbent president or the challenger from the opposition party won five times.

The only exception was in 1996 when Bill Clinton, a Democrat, successfully won re-election as president. That year, under Greenspan's leadership, the Federal Reserve lowered interest rates by 0.25 percentage points at the beginning of the year.

In addition, among the five election years with interest rate hikes, the largest increase occurred in 1984, with a rise of 2.56 percentage points. At that time, under the leadership of Paul Volcker, the Federal Reserve was still working to eliminate the lingering effects of high inflation. Republican Ronald Reagan won re-election by a landslide.

Among the six election years with interest rate cuts, the largest decrease occurred in 2008, with a drop of 2.75 percentage points. At that time, Federal Reserve Chairman Ben Bernanke was significantly reducing interest rates to mitigate the impact of the global financial crisis. Democrat Barack Obama won the presidency.

Since 1972, there have been only two presidential election years, 2012 and 2016, without any changes in interest rates. Obama won the 2012 election, while Trump won the 2016 election, bringing the presidency back to the Republican Party.

However, it is rare for the Federal Reserve to make interest rate changes so close to the election day. The most recent occurrence before this was in 2020. At that time, due to the outbreak of the COVID-19 pandemic, the Federal Reserve, under Powell's guidance, cut interest rates twice in March, totaling 150 basis points, bringing the policy rate close to zero. Democrat Joe Biden narrowly won that election.

The closest to the election day was in 1976. At that time, under the leadership of Arthur Burns, the Federal Reserve began lowering interest rates four weeks before the election day. Democrat Jimmy Carter defeated incumbent Republican Gerald Ford and entered the White House, although the interest rate decision was not made public at that time.

Independence of the Federal Reserve

The Federal Reserve has always been an independent federal institution. Chairman Powell and other policymakers have consistently stated that political considerations, including upcoming elections, do not affect their interest rate decisions.

Powell said at a press conference after the Federal Reserve policy meeting at the end of July: "This is my fourth presidential election at the Federal Reserve. Anything we do before, during, or after the election will be based on data, outlook, and risk balance, not on anything else."

He reiterated that the Fed's decisions are about serving the American people and are never about politics or anything else. When making decisions, no other filters are set.

However, not everyone is convinced. Earlier this year, Trump said he believed the Fed could lower interest rates to help the Democrats win the November 5th election. He also said last month that the President should have a say in the Fed's decisions.

Democratic presidential candidate and Vice President Kamala Harris, on the other hand, said she would respect the independence of the Fed. She said last month, "As President, I will never interfere with the Fed's decisions."

Editor/ping