The Fed, Presidential Elections, and Coincidence – Part 7

A few weeks ago, I had a few posts looking at whether the Fed acts to improperly influence elections. I noted among other things that real M1 per capita, real M2 per capita, and the fed funds rate all seem to follow the pattern one would expect if the Fed was trying to help its friends and hurt its enemies. In other words… the money supply was looser (i.e., real M2 per capita and real M1 per capita were higher, the Fed Funds rate was lower) in years in which an incumbent President was running for re-election, provided that incumbent was from the same party as the Fed chair. Conversely, the money supply was tighter when an incumbent from a different party than the Fed Chair was running. In years in which there was no election, or no incumbent running, the monetary policy fell somewhere in between the two extremes.

Readers got tired of the topic, but I still have a few things I want to look at on the topic, which means there are a still posts. Hopefully enough time has elapsed for another installment.

So far I have looked at fed funds rate, which the Fed controls completely, as well as M1 and M2, over which the Fed tries to control through the fed funds rate, open market operations, moral suasion, jawboning, and the required reserve ratio. This post looks at data over which the Fed doesn’t have control, namely the ten year treasuries.

Now, how would a cynic who feels that Fed is trying to influence elections expect the 10 year treasuries to behave? Would that cynic expect the 10 year treasuries to behave the way the other charts behave? Well, a cynic might expect that when the Fed is tightening up the money supply, it will cause the 10 year bond interest rate to rise. This is because the Fed Funds rate acts as a floor on all other interest rates. Thus, if the Fed Funds rate rises by two percentage points throughout a year, odds are the 10 year bond rate will do something roughly similar.

But what happens if the Fed Funds rate falls? Will the 10 year bond rate fall? It might. But it might not. That would require a greater willingness to loan out funds by potential lenders (which may occur due to looser money), but also an expectation on the part of potential investors that the US government and US economy has become a less risky place to park one’s money. Will this happen because of Fed machinations? Probably not.

Thus, a cynic would expect that around the time of elections in which an incumbent from a party other than the Fed’s chair is running, 10 year bond interest rates will be higher than they would be at any other time. (Thus, as with the other series, things will be least favorable to the economy and the White House.) But, the same cynic would not have any reason to expect the lowest 10 year bond interest rates to occur when an incumbent from the same party as the Fed’s chair is running for re-election, since the Fed’s loosening stance on real M1 per capita, real M2 per capita, and the Fed Funds rate will not translate to the 10 year bond market.

So what do we (cynics and non-cynics alike) see?

Well, there aren’t many observations in columns 3 and 4, but they fit with this cynic’s prediction. The argument about a small number of observations stops flying after a while when the predictions work monthly, and when they work on many disparate series (real M1 per capita, real M2 per capita, fed funds rate, and now 10 year treasuries).

Why the second column shows the loosest money supply most of the time, I really don’t know. Maybe I haven’t gotten as cynical as I should.

I hope to return to this topic in the next couple of weeks with a post about whether the Fed’s changes in the Fed Funds rate lead or follow changes in the economy’s growth rate, and whether the pattern looks different (and specifically, whether the pattern looks the way a cynic would expect) in years in which there is a Presidential election.


10 year treasury rates


As always, let me know if you want my spreadsheet.