The Fed and Elections

We are already starting to hear discussion about the point that this is an election year will influence Fed policy –either to ease or tighten more then it should because of the election.

The historic record is clearly that in election year the Fed does what economic fundamentals call for it to do and that the fact that it is an election year has no significant impact on Fed policy.

The chart compares actual fed funds with my version of the Taylor rule that gives inflation and unemployment equal weight. The vertical grey lines are Presidential elections. It shows that there is no significant difference between actual fed funds and the policy index in the period leading up to elections — if rising inflation calls for higher rates the Fed tightens or if economic weakness or a rising unemployment rate calls for lower rates it eases.

The historic record clearly demonstrates that Fed policy has not been influenced by elections beyond the standard belief that the Fed tried to avoid reversing policy in the last few weeks before presidential elections. Even under Volcker when actual fed funds were substantially above the policy index the direction of changes in actual fed funds was what the policy index implied it should be.

Yes, the recent jump in headline inflation implies that the Fed should not be easing now.