After a four and a half year hiatus, the Federal Reserve finally initiated 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 an interest rate action to a U.S. election in nearly half a century.

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

Therefore, although the Federal Reserve has adjusted rates in election years, starting a new rate cut cycle when the election day is only about 7 weeks away has only happened twice before - in 1976 and 1984.

What is the correlation with the election results?

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

The exception occurred in 2000 when Vice President Al Gore failed to keep the White House for the Democrats, and George W. Bush regained the White House for the Republicans. During the period from January to the end of October, then Federal Reserve Chairman Alan Greenspan raised rates by 1 percentage point, but the last rate hike was in the June meeting.

At the same time, in the six elections held in years when rates were cut, the incumbent president or the challenger of the ruling party won five times.

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

In addition, among the five election years of rate hikes, the largest rate 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 residual forces of high inflation. Republican Ronald Reagan won re-election by a landslide.

Among the six election years of interest rate cuts, the largest cut occurred in 2008, with a decrease of 2.75 percentage points. At that time, Federal Reserve Chairman Ben Bernanke was significantly lowering interest rates to ease the impact of the global financial crisis. Democrat Obama represented the Democratic Party in returning to the White House.

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

However, it is rare for the Federal Reserve to change interest rates so close to the election day: the most recent previous occurrence was in 2020. At that time, with the guidance of Powell, the Fed cut interest rates twice in March, totaling 150 basis points, bringing the policy rate to near zero. Democrat Joe Biden narrowly won the election over Trump.

The closest to the election day was in 1976. At that time, under the leadership of Arthur Burns, the Federal Reserve started lowering interest rates four weeks before the election day, and Democrat Jimmy Carter defeated the incumbent Republican Gerald Ford in winning the White House. However, 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 policy makers have consistently stated that political considerations, including the upcoming elections, will not at all influence their interest rate decisions.

Powell said at the 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， rather than anything else."

He reiterated that the decisions of the Federal Reserve are about serving the American people, and that the decisions have never been about politics or anything else. When making decisions, no other filtering criteria are set.

However, not everyone is convinced. Earlier this year, Trump suggested that he believed the Federal Reserve may lower interest rates to help the Democratic Party win the election on November 5th. Last month, he also stated that the president should have a say in the Federal Reserve's decisions.

Democratic presidential candidate and vice president Kamala Harris has said that she would respect the independence of the Federal Reserve. Last month, she said, "As president, I will never interfere with the decisions of the Federal Reserve."

Editor/ping