The Fed, Presidential Elections, and Coincidence – Part 4
I’ve had a few posts lately in which I noted that by coincidence, changes in the real money supply (M2) per capita look exactly like they would if the Fed were trying to influence Presidential elections.
Table 1 below shows the 12 month percentage change in real M2 per capita for years in which there is no presidential election, in which there is a presidential election with no incumbent, in which there is a presidential election and an incumbent from a different party than the Fed chair, and in years in which there is a presidential election with an incumbent from the same party as the Fed chair. As to color coding – green indicates the, um, friendliest short term monetary policy, orange the least friendly short term monetary policy. The data goes back to 1959.
(Results may differ marginally from those in the previous post as I inadvertently failed to include data from 1962 in the table last time around… apologies.)
In comments, readers have objected that the Fed doesn’t claim to target the money supply, or that it doesn’t have direct control of the money supply. The latter objection seems a bit odd to me… the Fed controls the money supply very directly through open market operations (buying and selling treasuries), the required reserve ratio, and moral suasion (pronouncements to banks during the monthly meetings with commercial banks – when the Fed tells banks that it would be a nice thing if the banks loaned out less money over the next month, why, by golly, the banks tend to think it would be a nice thing too). In fact, I would imagine that the interest rate, in particular the Fed Funds rate (which is the interest rate that the Fed does control) is probably only the second most important way of affecting the money supply.
Table 2 is similar to Table 1, except it shows the Fed Funds rate -that is, the interest rate the Fed controls directly.
The table above seems to indicate that for whatever reason, whenever there is an election with an incumbent from a different party than the Fed Chair, the Fed Funds rate has a tendency to be high. Similarly, when there is an election with an incumbent from the same party as the Fed chair, the Fed Funds rate is unusually low.
But perhaps these results are due to a few elections in which inflation was high. After all, the correlation between monthly inflation and the Fed Funds is over 50% for our sample period. Thus, it is reasonable to assume the Fed will take short term inflation into account when setting the Fed Funds rate. Table 3 looks at the Fed Funds rate less the one month inflation rate.
Hmmm…. It still looks like friends are favored and enemies are hosed. Well, maybe a one month inflation is an anomaly. Table 4 looks at the Fed Funds rate less the 3 month inflation rate.
Marginally less clear-cut, but still, there is a pretty obvious pattern.
So… one of the following must be the case:
1. Somewhere there is a massive mistake in my spreadsheet
2. The Fed is trying to benefit incumbents from the same party as the Fed chair and harm incumbents from a different party as the Fed chair
3. By shear coincidence, the Fed is acting as if it is trying to benefit incumbents from the same party as the Fed chair and harm incumbents from a different party than the Fed chair, but it has no such intent.
I frankly don’t find option to be remotely credible. I hope option 1 isn’t it, but to mitigate that, as always, my spreadsheet is available to anyone who wants it. And one final administrative detail – I think there may be a few more things to look at here before moving on from this topic. I can think of a few more posts I’d like to write assuming I can find the data.
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Data:
Monthly M1 and M2
Monthly CPI
Quarterly population data which I then linearized into monthly
Fed Funds Rate
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As always, let me know if you want my spreadsheet.
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Correction. Table 2 posted earlier was for the wrong post. Apologies.