Since 1980, the US Fed has announced interest rate decisions in every poll year, but there were no rate hikes or cuts in 2012.
US Fed calls through the election years
|
Election Year |
US Fed Reaction After Polls |
|
1980 |
2% hike in December, taking the Federal Funds Rate to 20% |
|
1984 |
1.25% cut in December, bringing the rate down to 8.75% |
|
1988 |
0.25% hike in December; overall rate stood at 8.38% |
|
1992 |
3 rates cut before the polls; Fed holds rates for over a year after polls |
|
1996 |
0.25% hike in March 1997; Funds Rate stood at 5.5% |
|
2000 |
0.5% rate cut in January 2001; Funds Rate stood at 6% |
|
2004 |
0.25% hike on November 10; Funds Rate at 2% |
|
2008 |
1% rate cut in December; Funds Rate stood at near-zero |
|
2012 |
No rate change |
|
2016 |
0.25% hike in December; Funds Rate at 0.75% |
|
2020 |
No change in rates between May 2020 to February 2022 after 2 cuts totalling 1.5% in March; Funds Rate stood at near-zero |
Election years in the 1980s saw frequent changes to the monetary policy cycles.
In 1980, the Fed hiked the Federal Funds Rate by 1%, then cut it by 5.5% gradually in response to the recession. However, rate hikes restarted in August as inflation began to rise. After Ronald Reagan took office in January 1981, the Fed raised the rate.
In 1984, the Fed hiked 2.25% as inflation rose but cut rates by 3.5% in the final three months as inflation stabilised. Fed’s monetary policy decision in December 1984, after Reagan came back to power, was to cut the rate.
In 1988, the Fed began with a small rate cut before hiking the interest rate for the rest of the year. In November, George HW Bush won the election by a landslide, after which there was a minor hike in December. The Fed more or less left rates unchanged until July 1990.
The 1990s and the years preceding the Great Recession saw the US Fed change rates as per the prevailing business cycle. This period also saw the US economy expand at an unprecedented pace. Hence, there were no drastic changes to the monetary policy cycle in election years unlike in the 1980s.
The recession and COVID response
Things changed dramatically in 2008 when the US entered its worst recession since the Great Depression.
A month before the elections, which voted African-American lawmaker Barack Obama to power, the US Fed cut the Federal Funds Rate by 1%. Following the election, there was another 1% rate cut.
There were no cuts or hikes in the interest rates in 2012 since the economy was still recovering from the recession. Notably, the effective interest rate stood at near zero.
In the run-up to the 2016 elections, Republican candidate Donald Trump questioned the US Fed’s inability to hike rates, alleging that the central bank had kept the rates artificially low to help the Obama administration.
At the time, various reports suggested that a Fed rate hike of 0.25% in December 2015 may have helped Trump win the presidential elections. This was the first rate hike in a decade since 2006. These reports argued that the rate hike hit several industries, especially in rural America, which is a Republican stronghold.
But by and large, the US economy was reaching normalcy.
Shortly after Trump’s victory, the US Fed hiked rates by another 0.25% and continued with the hiking cycle until December 2018.
COVID-19 was a ‘black swan’ event for the global economy. Especially in the US as it was an election year. After assessing the possible economic impact of the pandemic, the US Fed made two emergency cut rates totalling 1.5% in March 2020.
‘Fed not serving any politician’
While the broad details of the monetary policy cycles since 1980 differ, they have one thing in common. All were influenced by broad macroeconomic factors, not by the election season.
The US Fed has always maintained that its monetary policy decisions are independent of the political executive.
“We’re not serving any politician, any political figure, any cause, any issue, nothing,” said Powell during a recent interaction with reporters. He said the independence of the central bank is “good for the public”.
But Trump, who won the 2024 US election, has always batted for more say in the US Fed decisions.
In his first term, Trump repeatedly sparred with Powell, who has served as Fed chair since February 2018, over the Fed’s monetary policy.
With the 78-year-old returning to the White House, there is likely to be an element of uncertainty around future rate cuts as well as Powell’s job as the Fed Chair.
What we know right now is that Powell has no plans to quit before his full term expires in May 2026 as he mentioned in an event in July this year. Powell’s position as a Fed governor continues until January 31, 2028.
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