Experience and independence both say “yes”
A popular view among some market participants is that the Fed is unlikely to hike in a presidential election year. While many economic and market factors may influence when and how often the Fed hikes in the upcoming months, we do not expect the timing of US elections to play any meaningful role in the Fed’s policy deliberations. Neither historical experience during the past several hiking cycles, nor the Fed’s own desire for policy independence, suggests this will act as any constraint on the hiking cycle. Rather, we expect the Fed to gradually tighten policy in a data dependent manner during 2016 — regardless of how the political winds may blow.
Recent history: most hikes during election years
Historically, presidential election years have not precluded policy tightening by the Fed. Of the last five Fed hiking cycles, four either began during or continued into an election year. Two of these — 1988 and 2004 — started in an election year, some months before Election Day (in March and June, respectively). Two others — 1983 and 1999 — began the year before an election, with hikes continuing well into the following year. Both these hiking cycles stopped before Election Day (in August and May, respectively), perhaps fueling speculation about the Fed’s motives. But the Fed did not resume hiking once Election Day passed — in contrast to what one should expect if the Fed were temporarily holding back hikes around an election. Rather, each of these tightening cycles concluded as the Fed returned rates to a more neutral stance.
Is past performance a good predictor of future policy? Given how strongly independence is held at the Fed, we suspect it is. Numerous studies show that politically independent central banks deliver the best inflation and growth outcomes, and Fed officials know that even the perception of political influence can undermine their best intentions. Rather than trying to avoid being news by keeping policy unchanged in an election year, the best strategy would be to move in a very deliberate, well-communicated and datadependent way — one that not only has nothing to do with the political cycle, but wouldn’t even give that impression. Indeed, if the Fed really wanted to minimize political pressure today, it is not at all obvious if the better choice would be to hike to appease its most vocal Congressional critics or to stand pat. Any action or inaction is bound to upset (at least) one party — so why even try?
Unlikely variations on an unlikely theme
Finally, the view that the Fed cannot or will not hike in an election year yields some unlikely implications for monetary policy. One is that the Fed has to get going very soon — and perhaps somewhat aggressively front-load rate hikes — in anticipation of sitting on its hands for some time. In contrast, Fed officials have warned that they don’t want to hike prematurely, and they have emphasized both a data dependent and gradual approach to normalizing policy. Another variation is that if the Fed delays this year, they won’t be able to lift off for nearly another year — and thereby put policy significantly “behind the curve.” But it’s hard to believe the Fed would choose to wait that long and potentially let inflation get out of control because of politics; recent speeches note the risks of hiking too late. In the end, while several factors could potentially delay Fed rate hikes, we very much doubt next year’s presidential election will be one of them.
The market appears to agree…
Courtesy: BofAML’s US Economics Team
Please check back for new articles and updates at Commoditytrademantra.com
For More details on Trade & High Accuracy Trading Tips and ideas - Subscribe to our Trade Advisory Plans. : Moneyline