There has been so much talk about if the Fed will raise rates and inevitably we hear the argument that the Fed will not raise rates close to the election. That why I found this article so interesting. As the title points out from a total of 60 rate hikes 32% of these happened in an election year. The one aspect that we need to consider is that we are getting very close to the actual election and that the Fed raised rates n December of last year – so technically within 1 year of the election.

Overall it is more of interest to see that there has been rate hikes during election years before. But of course the argument stands… this time is different and the Fed is screwed.

Click here to visit the original posting page for the article below.

…

If you think the Federal Reserve (Fed) won’t hike rates before the presidential election on November 8, think again. Of the 60 rate hikes that have happened since 1980, 32% have occurred in election years. Considering presidential elections happen every four years (25% of the years), the data suggests the Fed is actually more than happy to hike in an election year.

The Fed has three more meetings in 2016: in September, November, and December. Many people argue that the Fed won’t hike in September or November because—in addition to the fact the data doesn’t support a rate hike—it’s just too close to the election. I think that second argument doesn’t hold water. If the data supports hiking rates, the Fed will hike whether there’s a presidential election or not.

What does the data suggest about the Fed’s willingness to move in an election year?

Academic research suggests voters care about the economy but in a myopic way, meaning they only notice how things are going in the run-up to the election. If the economy and stock market are doing well right before an election, voters are likely to attribute that to the incumbent party’s policies. If things aren’t going too well, then voters’ sentiment adds up to, “Let’s kick them out!”

Some would argue that, to get better economic and market outcomes, the Fed should cut interest rates before an election or not hike when they otherwise should. Now is not the time or place to discuss that view’s rationality, but that’s the basic prelude to the argument that the Fed would rather do nothing in an election’s run-up than do something and mess with people’s perception and voting.

But doing nothing—when doing something is supported by the data—is equally problematic for the Fed. That’s probably why the Fed—at least since the 1980s—has shown a great willingness to hike rates in an election year. The Fed also has shown a willingness to cut rates. It all depends on the data—and whether it’s an election year doesn’t appear to be an important data point.

Searching through the Fed’s archives, it’s clear that central bank officials discussed the elections throughout history, but it ranged from German and British elections in 1991 and 1992, respectively, to U.S. congressional elections in 1994 and Japan’s elections in 1996. The Fed’s key consideration was always whether—and to what extent—various political events affected the economy and financial conditions, not whether the Fed could affect the economy to influence an election’s outcome.

Under Volcker, Greenspan, and Bernanke, the Fed hasn’t let an election get in the way of setting monetary policy the way the Fed officials thought was appropriate. I don’t think that’s changed under Yellen. If the data is right, the Fed will hike. To say otherwise is to ignore history.

How the evolution of Fed policy factors into election history

There was a lot of evidence of political influence on the Fed in the pre-1951 period. 1951 was a bit of a watershed year, in that the Fed and Treasury came to what is known as the Treasury-Federal Reserve Accord. Prior to that, the Fed was basically obligated to keep the government’s funding costs low to help finance WWII.

From 1954 through 1980, little evidence suggests the Fed gave additional monetary accommodation, prior to not just presidential elections but also House elections every two years. Why? It was possibly done to accommodate the issuance of more debt at favorable interest rates. The post-1980 data doesn’t support the hypothesis that the Fed is less likely to act in an election’s run-up.

Paul Volcker’s appointment to Fed chair in August 1979 was another watershed event. He seemed to put to rest the idea that the Fed was in the pocket of the politicians. As noted, Greenspan, Bernanke, and Yellen have continued in that tradition. To show this, you can track how the federal funds rate changed in election years versus nonelection years.

The federal funds rate is currently the Fed’s primary operating target. The Fed targets full employment, stable prices, and moderate long-term interest rates, but to achieve these goals, it intervenes in the bank reserves market known as federal funds. These are overnight borrowings between banks. The Fed would traditionally buy or sell Treasuries to create or remove reserves to hit an interest-rate target.

Today, the Fed doesn’t intervene much in that market, as banks are sitting on piles of reserves. Instead, it uses other rates—like interest on reserves—to squeeze the federal funds rate into its target band. Looking at pre-1982 changes in the federal funds rate is problematic as an indicator of monetary policy stance. However, post-1980, these changes do correspond pretty well with policy stance evolution.

What investors should remember

The Fed’s key consideration has always been whether—and to what extent—various political events affected the economy and financial conditions, not whether the Fed could affect the economy to influence an election’s outcome.

Original blog post.

Please visit our blog, AdvantageVoice, for additional viewpoints from Wells Fargo Asset Management’s investment strategists, portfolio managers, and practice management experts. You can also follow us on Twitter at @WFAssetMgmt for real-time updates. Are you an advisor or institutional investor? Check out our website for investment professionals.

The views expressed are as of 8-23-16 and are those of Dr. Brian Jacobsen, CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the authors and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.

Wells Fargo Asset Management (WFAM) is a trade name used by the asset management businesses of Wells Fargo & Company. Wells Fargo Funds Management, LLC, a wholly owned subsidiary of Wells Fargo & Company, provides investment advisory and administrative services for Wells Fargo Funds. Other affiliates of Wells Fargo & Company provide subadvisory and other services for the funds. The funds are distributed by Wells Fargo Funds Distributor, LLC, Member FINRA, an affiliate of Wells Fargo & Company.

Not FDIC Insured • No Bank Guarantee • May Lose Value