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Do politics or elections weigh on the Fed’s decision-making?

August 22, 2024 / 2 min read

In recent decades and under successive leaders, the Federal Reserve has shown discipline in managing monetary policy in response to economic conditions, not political pressure. That’s been true even in presidential election years.

Rate policy changes in election years

The Fed and its monetary policy decisions have remained near the top of near-term considerations for investors and economists alike, awaiting the central bank’s long-anticipated pivot to lower its policy rate. The last few years have been unusually volatile for interest rates, as well as for the underlying economic factors that tend to drive them. Growth soared and has gradually slowed in the post-2020 period, pushing inflation to levels not seen since the 1980s. As discussion now focuses on the perceived need and opportunity for the Fed to trim its policy rate, talk has also resurfaced of the Fed’s apolitical mission and the ability of policymakers to tune out election noise and execute effectively.

Policymakers have shown a willingness over the last four decades to adjust central bank policy rates in response to economic developments, even in election years. In fact, in nine of the past 10 election years (2012 being the exception), the Fed has adjusted rates — either hiking or cutting — as economic conditions warranted. The underlying data would suggest those decisions were driven by its dual mandate of stable prices and full employment, not an effort to influence (or be influenced by) the outcome of a presidential election.

With inflation rapidly receding and labor conditions cooling, the Fed appears positioned to cut its benchmark policy rate for the first time in five years. The November election is unlikely to either deter or incentivize the Fed from trimming. With the credibility of central bankers on the line, rate cuts will be driven predominantly by what matters most: economic data, not political pressure or partisanship.

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