Does this reputation mean the FOMC is likely to wait until after the Nov 3 elections to make any monetary policy changes? What does the data tell us about the Fed’s behavior on policy positions in past election years? 

This study examines 27 U.S. federal election years including presidential and midterm elections from 1972 to 2024. For this study, “near election day” is defined from September 1 to Election Day. The elections are always held the first Tuesday after the first Monday in November. 

This study asks two questions; 1) Did the Fed take any action near an election day? 2) Over this 52-year period, does the Fed have any recurring behaviors that might offer some insight in today’s environment?

The data notes that 52% of the time the Fed did not make any changes near an election day. When they did act, 57% of the actions were a rate cut. 

The 1982 midterm election year was an outlier because January 1982 started with the Fed funds rate at 15% and the Fed lowered rates to 9.5% by August 27. On September 24, they increased rates to 10%. On October 12, the Fed once again cut rates to 9.5%.  This was the only time in this 52-year period, the Fed raised and cut rates during the “near election day” window, causing the total frequency to be 28 instead of 27.

The 1982 Fed action was due to the FOMC changing their target framework under Chair Paul Volcker from the Fed Funds rate to M1 money supply (“monetarist experiment”) in October 1979 as a method to fight inflation. In October 1982 the Fed reverted to targeting the Fed Funds rate. 

The Fed often mentions targeting 2% personal consumption expenditures (PCE) price index inflation. The concept of a 2% inflation target began in New Zealand in 1988. Several central banks adopted the idea in the 1990s. The Fed officially adopted the target rate in 2012. 

It was February 2000 when the Fed officially stated they shifted from the Consumer Price Index (CPI) to the PCE as their preferred inflation gauge.

Source: Bloomberg (FDTRMID), CME Group Economic Calculations

In the aggregate, a little more than 50% of the time the Fed does not act, but if needed they can act near an election.

Is there a difference when parsing the data of presidential elections from the midterm elections? 

Midterm elections occurred 13 times between 1972 and 2024. During that period the Fed did not act 54% of the time. When they did act, it was almost evenly split between rate increases and rate cuts. Once again, 1982 was a midterm election year and an outlier of both raising and cutting rates. If you remove the 1982 actions, the result would be no change 62% of the time and a 60%-40% split of increase rates and decrease rates.

The results suggest the Fed is less likely to act on monetary policy prior to a midterm election. But on occasion they have made changes.

Source: Bloomberg (FDTRMID), CME Group Economic Calculations

The four times the Fed increased rates prior to a midterm election included 1978, 1982, 2018, and 2022. These rate increases were tied to rising inflation. 

2018 was an outlier year relative to the three other midterm years, as January started at a historically low Fed Funds rate of 1.375% (the mid Fed Funds range). The Fed began raising rates in March due to an expanding economy with strong GDP and the August unemployment rate was at an historically low 3.8%. The July 12-month headline PCE inflation rate was 2.3% and core PCE at 2%. September 26, the Fed increased rates from 1.875% to 2.125%.

Source: Bloomberg (FDTRMID),  CME Group Economic Calculations

The Fed cut rates near midterm elections usually due to a slowing economy and / or a crisis. In 1982, inflation was declining and the Fed returned to targeting the Fed Funds rates instead of the M1 money supply. 

1990 experienced several economic factors that included a softening labor market as the headline U3 unemployment rate increased from 5.4% in January to 5.9% by September. The Iraq war was an energy shock as WTI crude oil front month futures prices rose from about $16.50 per barrel in July to about $40 by October. The Savings and Loan (S&L) crisis peaked in 1990 with hundreds of savings and loans associations failing, causing banks to reduce lending. The 1990 GDP growth rate was 1.9% versus 3.7% in 1989.

The fall of 1998 witnessed a crisis as Russia defaulted on their debt, causing contagion across the emerging markets and the downfall of the hedge fund Long Term Capital Management. This in turn caused the Fed to cut rates with one of the cuts occurring  between meetings.

Source: Bloomberg (FDTRMID), CME Group Economic Calculations

In Presidential election years, the Fed was evenly split between pausing and acting. In the years when the Fed acted near a presidential election, they cut rates 71% of the time.

Source: Bloomberg (FDTRMID), CME Group Economic Calculations

Only two Presidential election years did the Fed increase rates. The September and October 1980 rate increases were due to the Fed fighting inflation as they increased rates several times in 1980, starting in February. The headline CPI inflation rate reached 14.4% by June after peaking in March at 14.8%

The Fed Funds rate reached an emergency low of 1% by June 2003 due to the dot com bubble and the recession in the early 2000s. To begin normalizing rates, in June 2004 the Fed began raising rates until 2006 as the economy had recovered. 

Source: Bloomberg (FDTRMID), CME Group Economic Calculations

There were five presidential elections when the Fed decreased rates.

Source: Bloomberg (FDTRMID), CME Group Economic Calculations

Lastly, when the “near election day” is given a narrower definition of October 1 to election day, the following results occur.

67% of the time, the Fed did not act. When they did act, 67% of the Fed action related to cutting interest rates. 

There have been only two occasions when the Fed acted in November, just before the election. It was 1978 and 2022, both midterm election years, both years experiencing increasing inflation.

Source: Bloomberg (FDTRMID),  CME Group Economic Calculations

The Fed has established a reputation for not making any monetary policy changes close to an election. During the 27 elections, the data shows they don’t act about 52% of the time. However, if the study starting time is October 1, the Fed doesn’t act 67% of the time. 

When there is rising inflation or a crisis, the Fed is likely to act near an election. The data also suggests they are more likely to cut rates than to raise rates based on the economic situations of the past 50 years. And they are more likely to act in September versus October. 

Can this historical perspective give us some direction of what the Fed will likely do in 2026?