The U.S. Federal Reserve chairman hasn't shied away from acting on interest rates in election years, opting to raise and cut rates in past years as Americans readied to head to the polls, a new report suggested Monday.
The study, conducted by asset manager Prudential Fixed Income, looked at election years as far back as 1988 and found, in some cases, the Fed hasn't held off on hiking rates despite a pending vote.
“Greenspan does not in fact have a history of staying on hold during election years,” Prudential market economist Ellen Gaske said. “Instead, the Fed under his tenure appears to have responded to market conditions prevailing at the time without regard to the election cycle.”
The Fed's next decision comes Tuesday afternoon. The Fed's trendsetting target for the federal funds rate now stands at 1 per cent. Some economists have argued that that a rate hike this year is unlikely because of the timing of the U.S. presidential election, which comes in early November.
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Few expect rates to rise in Tuesday's announcement, but most economists will be looking for signs that borrowing costs could start climbing by late summer.
They have suggested that the central bank is likely to leave its key rate alone until either late this year or early next year because it doesn't want to be seen as taking political sides in the election.
Roughly half of economists in a recent Reuters Poll said they don't expect to see a rate hike until late 2004 or early 2005. The other half expected a late summer move.
However, despite suggestions that the Fed may take the timing of the election into account, Prudential found that that hasn't been the case in past years.
For example, it said, in 1988 the central bank — which had cut rates after the market crash the previous year — reversed course in March and had delivered 100 basis points in tightening by election time. (A basis point is 1/100th of a percentage point.)
Similarly, Prudential said, the central bank cut its key target for the federal funds rate by 100 basis points between April and September of 1992, continuing an aggressive easing cycle that began in mid-1989.
As recently as 2000, the Fed raised rates by 100 basis points between February and May before staying put the rest of the year. However, the central bank then began 2001 with a relatively rare inter-meeting cut.
All those moves, Prudential argued, were carried out because of economic necessity, regardless of the political climate.
“While we expect the Fed to hike rates this year, whatever the Fed decides to do, it will be due to the economic environment and not because of the election on Nov. 2,” Ms. Gaske said.