The Fed, Presidential Elections, and Coincidence – Part 2
Last week, I noted that by some odd coincidence, changes in real M2 per capita look exactly like they would if the Fed were trying to influence Presidential elections. I noted that if one assumed that the Fed wanted to influence elections, it was more likely to favor incumbents. This is partly because the incumbent was likely to have appointed or re-appointed the Fed Chairman and other Fed board members, and partly because the most of the Presidents and most Fed Chairmen in the sample were Republicans.
Continuing on the search for coincidences… whether or not the Fed appears to favor an incumbent might well depend on whether the Fed Chairman is from the same party as the incumbent. If the Fed Chairman were biased (and presumably the board would be biased in the same way), he might seek to benefit incumbents from his own party, be neutral when there are no Presidential elections or no incumbent is running, and might be unfavorably disposed toward incumbents from a different party. This would manifest itself as follows: in the months leading up to November in which there is a Presidential election and the incumbent is from the same party as the Fed Chairman, Money Supply will increase more than in years when there is no election or no incumbent, and the Money Supply will increase the least (or decrease the most) in those same months in which there is an election in which there is an incumbent President from a different party than the Fed Chairman.
The table below shows the 3 month percentage change in real M2 per capita (i.e., the change in M2 over and above (or under and below) the inflation rate and the change in the population) in each of the months leading up to and including November in years in which there is no presidential election, in years in which there is a presidential election but no incumbent. It also shows the years in which there is a Presidential election and an incumbent, differentiating between whether the incumbent and the Fed Chairman come from the same or opposing parties. Note that the category showing the fastest growth in real M2 per capita is colored green, and the category showing the slowest growth in real M2 per capita is colored orange.
The Fed’s behavior seems to very closely approximate what one might predict if one believed the Fed was biased and acting on its biases. (The coincidences are starting to get very big.) In 9 of the 10 months leading up to and including November, the growth rate in real M2 per capita is fastest when there is an election involving an incumbent coming from the same party as the Fed Chair. (Clearly, there is a limit to how long the Fed thinks its necessary to goose things along for someone they like – it seems that limit is about ten months since the effect isn’t there in January or December.) Similarly, for growth rates in real M2 per capita are smallest (and usually negative) when the upcoming election involves an incumbent from a different party than the Fed Chair.
Now, it is true there are very few observations, especially where the Fed Chair and the incumbent are from different parties. But as the chart above shows, the correlation between the increase in the Money Supply from one month to the next is not very high, so in fact, each month could reasonably construed as a separate observation, in which case the number of observations is no longer very small.
Which leads to the coincidence explanation. This requires believing that its just happenstance that the odds are strangely high that the Fed has to (1) fight recessions recession right before an election in which the incumbent is from a different party than the Fed chair and (2) worry about liquidity crunches right before an election in which the Fed chair and the incumbent are from the same party.
But believing in coincidences is a good thing. Otherwise, it would be a sign that the Fed is not independent, and that perhaps words like “illegal” and “unlawful” apply to what we seem to observe.
Monthly M1 and M2
Quartlery population data which I then linearized into monthly
As always, let me know if you want my spreadsheet.
Update… If you’re reading this and wondering what the problem is… from the Fed’s own FAQ:
“The intent of Congress in shaping the Federal Reserve Act was to keep politics out of monetary policy. The System is independent of other branches and agencies of government. It is self-financed and therefore is not subject to the congressional budgetary process.”