The Federal Reserve this week decided to cut interest rates by 50 basis points, marking the start of an easing cycle for the central bank, which is at the forefront of the upcoming U.S. presidential election.

Although interest rate policies are rarely unchanged in election years, starting a new rate-cutting cycle less than 10 weeks before Election Day has only happened twice before - in 1976 and 1984.

The Federal Reserve is an independent federal institution, and Federal Reserve Chairman Powell and other policymakers have consistently stated that political considerations, including the upcoming election, have no influence on their interest rate decisions.

Powell said at a news conference after the Fed's policy meeting at the end of July, "This is the fourth presidential election I have experienced during my time at the Fed. Anything we do before, during or after the election will be based on data, outlook and risk balance, not on anything else."

Not everyone believes him.

Republican presidential candidate Trump said earlier this year that he believes the Fed may lower interest rates to help the Democratic Party win the election on November 5th. Trump said last month that the president should have a say in the Fed's decisions.

Democratic presidential candidate and Vice President Harris simply said she would respect the Federal Reserve's independence. "As president, I would never interfere with the Fed's decisions," she said last month.

Interest rate changes in election years.

Since 1972, except for two presidential election years, the Federal Reserve has changed interest rates, and the actions of the Federal Reserve are basically divided into two types: raising and lowering interest rates.

The policy interest rate of the Federal Reserve has risen in 5 election years and fallen in 6 election years. In most cases, these changes are part of a cycle that begins one year or more before the election year.

In the 5 election years when interest rates rose, the incumbent president or the party controlling the White House won 4 consecutive terms.

In the year 2000, there was an exception when Vice President Al Gore failed to keep the White House for the Democratic Party, and George W. Bush regained the White House for the Republican Party. During the period from January to the end of October, former Federal Reserve Chairman Greenspan raised interest rates by 1 percentage point, but the last rate hike took place in June, about five months before the election.

Meanwhile, in the 6 election years when interest rates fell, the incumbent president or the challenger of the ruling party won 5 times.

In 1996, there was an exception when the incumbent Democrat Bill Clinton won his second term. Also under Greenspan's leadership, interest rates fell by 25 basis points from January to the election date, although the last interest rate cut occurred at the beginning of that year.

In the election years before the election day, interest rates rose by a maximum of 2.56 percentage points. This happened in 1984 when the Federal Reserve, led by Volcker, was still working to eliminate the remnants of high inflation. Republican Ronald Reagan won re-election by a landslide.

The largest interest rate cut occurred in 2008, with a decrease of 2.75 percentage points. At that time, the then Federal Reserve Chairman Ben Bernanke was significantly lowering interest rates to cushion the impact of the global financial crisis. Barack Obama won back the White House for the Democratic Party.

Since 1972, there have been only two presidential election years without interest rate changes, namely 2012 and 2016. Obama won reelection in the former election, while Trump won in the latter, reclaiming the White House for the Republicans.

Election years that mark the beginning of an interest rate cut cycle.

Although interest rate changes in election years are common, the start of a new interest rate cut cycle (a series of rate cuts after at least five months of interest rate hikes or rate stability) is not as common.

Prior to the Federal Reserve's interest rate decision this week, there have already been four instances since the 1970s where an interest rate cut cycle began in an election year, with the challengers of the incumbent party winning in three of those cases.

The most recent example was the 2020 presidential election. At the beginning of the COVID-19 pandemic, the Fed, under Powell's direction, cut interest rates twice in March of that year, totaling 1.5 percentage points, bringing the policy interest rate to near zero. Democrat Biden narrowly defeated Trump in that election.

A more recent interest rate cut cycle that was closer to the election day occurred in 1976, when the Fed, led by Arthur Burns, began cutting interest rates 4 weeks before the election day. However, it is unclear how much impact this had on the victory of the Democrat Jimmy Carter over the incumbent Republican Gerald Ford, as the interest rate decision at the time was not publicly announced in a timely manner.

Editor/Somer