Fed's Non-move and 2016 Forward Calendar (June 15)

Mike & Co.,

This afternoon, the Fed announced that it would yet again defer a rate hike.  The vote was unanimous.  May’s dismal job report put an end to speculation that the Fed might raise rates during its June 14-15 meeting.  Despite this delay, Fed watchers still expect that the current policy guidance, which predicts another two rate increases this year, will hold true.

Whether, how often, and by how much the Fed hikes rates between now and election day will be the subject of much speculation.  An analysis of today’s news and the electoral implications follows.

Best,

Dana

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A Close Reading of the Fed Statement

Today’s Fed release included an economic analysis pointing to a divergence between the labor market and the economy at large.  As the May jobs report indicated, labor market growth has slowed recently, even as an uptick in economic growth occurred during the same time frame.

The Fed also expects for inflation to rise to 2% in the medium term and for economic growth to reach 2% this year, slightly lower than projected at the March meeting.

Transparency as Action or Reaction?

Beginning with Ben Bernanke’s tenure as Federal Reserve Chairman, the Fed has been increasing its transparency for a number of years.  Janet Yellen has continued this new tradition, publishing long descriptions of policy-making deliberations, convening regular news conferences and releasing quarterly rounds of economic forecasts by senior Fed officials.

This is a sea change from past leadership, which preferred to hold their cards close to their chest lest markets overreact or politicians attempt to meddle in their actions.  As elected officials began to increase pressure on the Fed to account for its decisions and to justify its independence, its push toward transparency morphed into an institutional necessity.

Janet Yellen was a vocal advocate for transparency long before she assumed the Chair. In fact it was Yellen who advocated for quarterly press conferences to discuss the Fed’s targets and forecasts.   The argument that Yellen, and Bernanke before her, put forward is that transparency within the Federal Reserve is a driver of growth in itself –- by keeping markets and investors informed of the Fed’s decision making process and its thoughts on the economy they hope to create a level of stability which encourages investment and growth.

Remaining Fed Meetings in 2016

Only four meetings remain on the FOMC schedule this year: July, September, November, and December.  For her part, Yellen insisted today that the Fed would act when the economic data supports it, regardless of how it might play out politically.  If the Fed moves forward with the projected two rate hikes the markets expect, the timing may be unfortunate, since a back-to-back hike in November and December and one immediately following the election in November seem unlikely to happen.

Accordingly, the market is betting on a December 2016 rate hike.  That leaves markets expecting a hike in July or September.  A September increase would be right in the heart of election season –- market reaction, even a contraction, might occur, but would not likely reach the real economy and influence voters much during the election.

The Fed’s Impact on the Election

How does the Fed can influence national politics?  Through the interest rate policy. In any election, weak or disappointing economic performance hits the incumbent party the harder, meaning that a rate hike before the election could hinder Democrat’s at the polls.

Janet Yellen has been adamant that the Fed does not consider the political consequences of its actions, but the truth is that the committee does not operate within a vacuum.  The extent to which politics influences markets to the extent to which politics influences Fed decision making.

Whether in an election year or not, rate policy is ostensibly based entirely on objective economic indicators, but does that mean the Fed does not have an impact on the national election?  History shows that a rate rise is followed by a contraction in credit and stock market turmoil.  In any election poor economic performance hits the incumbent party the hardest, meaning that a rate hike soon before the election could hinder Democratic performance at the polls.  On the other side of the coin, political developments can have impacts on the economy – if a candidate gives a speeches that spook markets, the Fed will take notice.