There is little doubt that the Federal Reserve is a highly political organization. The Fed Chair is nominated by the president and confirmed by the U.S. Senate.
Those who are critical of the Fed probably overestimate the degree to which the Fed tries to influence elections, particularly the presidential election. There have been several times in history where the Fed has seemingly ignored presidential politics.
The best example is in 1979/ 1980, where Fed Chairman Paul Volcker allowed interest rates to rise and slammed on the monetary brakes. I don’t know if it cost Jimmy Carter the election, but it almost certainly guaranteed his loss. And Ronald Reagan was no favorite of the establishment.
The establishment came to accept Reagan, as he did not enact radical free market policies to reflect his rhetoric. He did cut marginal income tax rates substantially, but he also hiked payroll taxes. Spending continued to grow under his watch, and the debt spiked higher due to the spending (and not due to the tax cuts as some would have it).
Still, Volcker – who was appointed by Carter – enacted a tight monetary policy that led to recession. Volcker and the Fed were not playing politics. Their primary concern was saving the U.S. dollar, as price inflation was well into double digits at that time.
In 2006 through 2008, Ben Bernanke kept a relatively tight monetary policy until the major fall of 2008. If he had kept monetary policy looser, it might have been enough to hold off the recession until after the 2008 election. Of course, there is no way to know, and there is no way that Bernanke could have known the financial crisis would hit so hard.
We can doubt that McCain would have defeated Obama anyway, but the bad economy almost guaranteed an Obama victory. Bernanke was appointed by Bush, but he did him no favors prior to the fall of 2008. In fact, Bernanke did himself no favors, as Obama eventually replaced him with Yellen.
I think this election may really be different. I don’t know if it has impacted the committee’s decisions not to hike rates since December 2015, but it would not be surprising. Virtually the entire establishment is against Trump and they want to ensure a Hillary Clinton victory. Any rate hike that could lead to a possible downturn in stocks would be bad news for Clinton, who is the status quo candidate.
The Fed has actually had a tight monetary policy for two years now. It ended QE3 in October 2014. In this sense, the federal funds rate does not mean as much as it has in the past. Still, it is somewhat symbolic at this point. The Fed stopped creating new money before Trump was even a serious candidate. They couldn’t easily start up QE again, politically speaking. They can, however, come up with excuses to hold off on hiking the target rate.
The FOMC’s next meeting and policy announcement is on November 2, less than a week before the election. It is almost a certainty that the Fed will not touch anything or make any dramatic statements.
The big question at this point is the December 14th meeting. If Trump is elected, then it seems more certain that the Fed will hike rates, not caring as much about what happens. However, if they were really political, you would think they might wait until he actually takes office.
If Clinton is elected, I don’t think it is going to have a major impact on policy at that point. She will be there for four years if she survives her bad health. Either way, a Democrat will be in office for another 4 years. The Fed can’t keep its policy the same forever in order to try to prevent a recession.
It is almost a guarantee that there will be a recession within the next 4 years. The so-called recovery since 2009 has been weak, while the Fed pumped in massive amounts of money until 2014. In the meantime, the debt has continued to grow at a staggering pace.
If Clinton is elected, she is going to have a tough time blaming a bad economy on Bush or even the Republican Congress. Congress should be blamed to a certain degree, but the public tends to blame the president. Actually, it is the Fed that should be blamed the most. The major malinvestments happened on Bernanke’s watch when he instituted QE1, QE2, and QE3.
At this point, I have no idea if the Fed will raise its target rate in December. I am not even sure if it matters much, except perhaps symbolically. But I don’t think a Clinton victory is going to change its decision one way or another.
If the economy shows signs of tanking in the next couple of months, then the Fed will delay hiking again. If the downturn is bad enough, then we could see QE4 on the horizon. That will change everything.