The managers of America’s monetary policy, the Federal Reserve, consistently claim to stay clear of partisan politics—but not everybody is convinced. When the Federal Open Market Committee (FOMC) announced a half-point reduction in the Fed funds rate on September 18, 2024, Alabama Senator Tommy Tuberville accused the central bank of trying to boost the Democratic nominee. He called the move "shamelessly political," asserting that "our nation’s central bank has no business moving rates this close to an election." In his view, the rate cut was a deliberate attempt to favor Kamala Harris.
Fed Chair Jerome Powell offered a different perspective. In his press conference following the announcement, he reiterated the Federal Reserve’s independence: “We’re not serving any politician, any political figure, any cause, any issue, nothing,” Powell insisted. He emphasized the Fed’s mandate—ensuring maximum employment and price stability—as the sole guiding force behind their decisions.
This situation raises an interesting question: does Federal Reserve policy actually influence elections, and if so, can it realistically favor the incumbent political party?
The Long Lag of Monetary Policy
Critics who believe the Fed is incapable of political independence often ignore the timing aspect of monetary policy. To be effective in influencing the broader economy—and in turn, voters—the effects of an interest rate cut must happen within a politically meaningful timeframe. This is where the claims against the Fed become shaky.
Milton Friedman, the renowned economist, famously noted in his 1959 book A Program for Monetary Stability that monetary policy changes have a significant lag. Friedman and his collaborator, Anna J. Schwartz, found that changes could take anywhere from 4 to 29 months to ripple through the economy. More recently, Federal Reserve Governor Christopher Waller put the length at nine to 12 months, while Atlanta Fed President Raphael Bostic suggested it could take up to 18 months to two years for monetary changes to substantially affect inflation.
Given these substantial lags, it is highly unlikely that an interest rate action on September 18 would lead to a meaningful economic turnaround in time for the upcoming November election. In other words, the idea that the Fed could effectively "throw the election" through a rate cut seven weeks beforehand is far-fetched.
Stock Market Reactions vs. Voter Behavior
A natural counterpoint to this argument might focus on the stock market. After the Fed’s rate cut, the Dow Jones Industrial Average rose by 3%, suggesting an immediate market reaction. However, can a short-term rise in the stock market meaningfully influence voters, as some critics argue?
Historical data from 32 presidential elections between 1896 and 2020 suggests that the connection between October stock market performance and election outcomes is not as clear-cut as some would think. While October markets rose before 53.1% of elections and fell 46.9% of the time, the incumbent party won 62.5% of the elections overall. A closer look shows that in 71.9% of cases, the October stock market movement agreed with the election outcome—meaning a rising market coincided with an incumbent victory, or a declining market coincided with an incumbent loss.
This correlation might seem compelling, but there are a few important caveats:
Not Always Predictable: The correlation between October market movements and election outcomes is not ironclad. In 2012, for example, Barack Obama was reelected despite a decline in the Dow. Most recently, three out of the last six elections saw October market movements that did not align with the eventual election outcome.
Correlation vs. Causation: The idea that a rising stock market leads directly to an incumbent’s reelection oversimplifies things. A strong stock market could be a symptom of other positive economic conditions that favor the incumbent—factors that the Fed does not directly control, especially in the short term.
Magnitude Matters: Seven of the 20 cases where market direction and election outcome agreed involved tiny movements—less than a 1% change in the Dow. (In five instances the rise was +0.3% or less.) Is it realistic to think a marginal market move could sway voters in a presidential election that encompasses so many issues? Probably not. Once we discount these minimal movements, the agreement rate falls to just 50%, meaning the connection between stock market performance and election outcomes may be weaker than it initially appears.
The accusation that the Fed jeopardized its political independence to sway the outcome of this November’s presidential election is difficult to substantiate. The timing of the rate cut makes it implausible that it could boost the broader economy fast enough to make a difference. While rising stock prices following a rate cut can boost sentiment, historical data shows that a stock market rally in October does not guarantee an incumbent’s victory.
In short, the correlation between monetary policy, market performance, and election outcomes is complex and full of nuances. Those looking for a smoking gun of Fed interference will likely come up empty-handed. Instead, the relationship between economic conditions and voter preferences remains more about long-term trends than any single action taken close to Election Day.
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