Home etftrends.com Note from the Desk: Does Election Season Influence the Fed’s Decisions?

Note from the Desk: Does Election Season Influence the Fed’s Decisions?

By Komson Silapachai

As we enter the second half of the year, the market is focused on the leadup to the US presidential election in November. There’s a common debate about whether the timing of the election impacts the Federal Reserve’s policy choices. One side argues that, in a bid to appear apolitical and independent, the Fed avoids any big moves during elections; however, history shows us that the Fed has not refrained from taking monetary policy action during election years. Instead, the Fed has focused on its mandate, which is informed by economic developments rather than the election timetable, in making policy decisions.

Since the 1950s, the Fed has changed its policy rate in every presidential election year, with the exception being 2012, when interest rates were already at zero. (As an aside, the Fed did not hesitate to enact a third round of quantitative easing in September 2012, which was nicknamed “QE-infinity” as it was an open-ended program with no total purchase limit.) Even during the second half of presidential election years, in the thick of campaign season, history shows us that the Fed hasn’t shied away from shifting policy as economic and financial conditions warrant.

Recent data readings continue to point to rate cuts occurring in the second half of 2024. The Fed’s preferred measure of inflation, the Personal Consumption Expenditures Price Index excluding food and energy (core PCE), rose at the slowest pace this year in May. Our view is that if inflation data continues to trend lower over the coming months, the Fed could commence rate cuts at the September FOMC meeting.

Monthly Growth in Core PCE Index

As we progress through another election year, investors and economists alike continue to speculate about the Fed’s willingness to move. Will the Fed continue its pattern of adjusting rates, or will it hold steady? The answer lies in the economic data leading up to the election. The Fed will be guided by economic data, not political pressure, sticking to its main goals of managing inflation and unemployment.

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