Investing.com – While conventional wisdom suggests that the Federal Reserve (Fed) would be hesitant to make changes to monetary policy ahead of U.S. presidential elections, the historical record shows that this is not always the case and markets should not assume that the central bank will stand pat in the two months ahead of the event.
Every four years the Fed faces the same dilemma of trying to dodge accusations of having a political bias, but media, and analysts, often take for granted that the Fed “will not dare” to make changes to monetary policy within the run-up to the elections.
Current Fed chair Janet Yellen recently came under fire from Republican presidential candidate Donald Trump who accused her of maintaining the low interest rates because that is what President Barack Obama told her to do.
“It’s staying at zero because she’s obviously political and doing what Obama wants her to do,” Trump told CNBC on September 12.
Yellen is not the first Fed chief to be criticized by heads of state as rate hikes to fight inflation in the 1970s under Paul Volcker were partly blamed for then-President Jimmy Carter’s 1980 defeat and former President George H.W. Bush blamed Alan Greenspan’s lack of more aggressive easing in the 1990-1991 recession for his failure in the 1992 election.
However, Yellen herself tried to play down the effect of the presidential elections on Fed policy at a news conference back in June.
“We are very focused on assessing the economic outlook and making changes that are appropriate without taking politics into account,” she insisted.
Even so, most analysts’ reports in the run-up to Wednesday’s decision include a mention of the thought that the Fed’s hands are tied until December, precisely due to the November 8 election this year.
Take Goldman Sachs: “We see December as the most likely candidate (for a hike), as officials would be reluctant to raise rates in November so close to the U.S. presidential election.”
However, history has shown that the Fed indeed has made a move on several occasions.
In fact, the Fed has cut interest rates within two months of the election three separate times since 1984.
Furthermore, and more in line with the current path of monetary policy, the U.S. central bank did indeed increase rates by 25 basis points on September 21, 2004, exactly 12 years ago to the day ahead of Wednesday’s decision.
Markets currently only price in a hike at the December meeting, with meager odds of just 15% for a move at 2:00PM ET (18:00GMT) Wednesday.
According to Investing.com's Fed Rate Monitor Tool, the probability ticks up to 22% for the November 2 decision.
Barring a surprise later in the session, market participants will weigh in on the statement and updated forecasts for economic growth and interest rates for clues on when the central bank contemplates a return to policy normalization.
Yellen will undoubtedly have the “final” word in what will be a closely-watched press conference 30 minutes after the release as investors look for any change in tone about the economy or future rate hikes from the head of the U.S. central bank.
Assuming that markets are correct and the Fed refrains from policy tightening on Wednesday, it will be these references, and not the fact that the U.S. will be choosing a new president on November 8, that could move the odds for the timing of the next rate hike.
Stay up-to-date on market expectations for future Fed policy moves by visiting:
http://www.investing.com/central-banks/fed-rate-monitor