Last month, prices fell to their lowest levels almost two years. The June Consumer Price Index dropped to 3.0% annually–down from 3.4% the prior month—and is now on the verge of hitting the Federal Reserve’s inflation target of 2%.
Almost immediately after the release of the CPI data, Republicans warned the Federal Reserve not to cut rates prior to the election in November. After Fed Chair Jerome Powell testified before the Senate Banking Committee Senator Kevin Cramer (R-N.D.) argued that “I personally don’t think they should. Anything they do before November would be rightfully—would raise the question of their own independence.”
But will the Fed heed the call from Republicans to keep rates at their current level (even if CPI drops further) when its Federal Open Markets Committee meets on July 31 and September 18? Based on past history, the answer is a resounding no.
Over the past 50 years, the Federal Reserve has raised or lowered the target for the federal funds rate seven times in the final three months leading up to a U.S. presidential election:
- On Oct. 19, 1976, the central bank cut rates by 50 basis points (to coincide with the official end to the gold standard), just weeks before voters went to the polls to choose between President Gerald Ford and Governor Jimmy Carter.
- In the three months leading up to the 1980 election between President Carter and Governor Ronald Reagan, the Fed raised rates on three occasions (by 1% each time), in an effort to combat historically high rates of inflation.
- On Oct. 2, 1984, the Fed slashed rates by 0.5%, roughly one month prior to Reagan’s historic victory over former Vice President Walter Mondale.
- On Aug. 16, 1988, the Fed hiked rates almost 2 percentage points. Despite this, Vice President George H.W. Bush overcame a significant polling deficit to beat Massachusetts Governor Michael Dukakis handily.
- On Oct. 8, 2008, the central bank cut rates by half a percent in response to the deepening financial and housing crisis. In November, Barack Obama was elected president in a resounding win over Republican John McCain.
In each circumstance noted above, the Fed acted in response to the economic situation, and it did so dramatically (moving rates up or down by at least 50 basis points). Therefore, it is fairly safe to assume that if the Fed governors believe they have successfully reached their inflation target, and think a reduction of the federal funds rate is necessary, they would do exactly that—regardless of politics.
In fact, if the central bank wants to avoid the appearance of political favoritism, policymakers must cut rates if economic conditions call for it, just as they resisted pressure from Democrats earlier this year to raise their inflation target (which would have enabled the Fed to reduce the federal funds rate and potentially boost the economy).
The good news for Republicans is that even if the Fed does lower interest rates, the likelihood it will benefit the incumbent president, Democrat Joe Biden, is marginal at best.
For example, the party controlling the White House did not hold onto the presidency after the Fed slashed rates prior to the 1976 and 2008 elections. Meanwhile, George H.W. Bush retained the presidency for Republicans in 1988, despite the Federal Reserve raising the federal funds rate by a whopping 2%.
Finally, any rate cuts this late in the election cycle will not likely achieve full impact until after Election Day on November 5, meaning that neither Republicans nor Democrats need worry or get too excited about what the Fed does in the coming months. But for whoever wins the White House—well, that is another story.
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