The Fed Has No Qualms About Monetary Policy Around Presidential Elections

Includes: FXE, SPY, UUP
by: Sean Bellamy McNulty

The Fed interest rate decision on the 13th comes at an interesting time. The U.S. is not technically in a recession, but the job numbers continue to soften-- putting them at risk of re-entering one. Worldwide, Europe is already in a recession and the one stalwart economy, Germany, had a contractionary PMI reading in August and weak readings since the beginning of the year. China's stimulus measures have yet to have an impact as their Industrial Production, Imports and Exports YoY disappointed a few days ago. On top of all of this, there is an election with the Fed a central topic of the upcoming debates thanks to Ron Paul. In fact, the head of the Republican ticket, Mitt Romney, has declared that he wouldn't support the reinstatement of Bernanke if elected.

Historically, if the U.S. were to fall into a recession prior to November - an unlikely proposition - it would actually favor the sitting President. Every year that a recession has coincided with an election, the Democrats have won. Keep in mind, this is specifically with regards to a technical recession.

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With regards to Fed's actions, we're all familiar with the happenings in 2008, but what about in other years from September to November? The Fed is ideally supposed to be above the political fray, which is apparently accomplished by seating members of the Board of Governors at the Fed for 14 year terms and banning elected officials and members of an administration from sitting on the board. That being said, how frequently has the Fed taken action in the months before an election?

I've compiled a recent history below:

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Since 1976, the Fed has been surprisingly random, leaving rates flat, raising or lowering them in 3 the election years each. With regards to democratic or republican administrations, republicans have received better treatment from the Fed, presuming lowering rates would help the incumbent (lowering rates = monetary stimulus). Rates were lowered for Jimmy Carter in 1976, as well as for Ronald Reagan in 1984. Although they were raised in 80, 88 and 04 on republicans, they were incumbents all of these years and were re-elected.

When commencing the writing of this article, I had the personal bias that the Fed would not take any action between September and November during an election year to ensure that they remain above the political fray. Following this logic, I presumed that the probability of QE3 was overpriced in the markets. After reviewing the election years since 1976, it is evident that the Fed will do what it decides is necessary, regardless of whether the timing is politically sensitive or not.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.