The Federal Reserve Shows It’s Influenced by Politics

November 2, 2016, 7:16 PM UTC
Federal Reserve Chair Janet Yellen Semiannual Monetary Policy Report To The Senate Banking Committee
Photograph by Bloomberg via Getty Images

The Federal Reserve’s Federal Open Market Committee (FOMC) held its final meeting before the presidential election this week, announcing Wednesday that it had opted not to raise interest rates,

But the FOMC’s decision was not as interesting as the text of its statement, which showed a growing consensus for another rate increase at the Fed’s next meeting in December. “Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and growth of economic activity has picked up from the modest pace seen in the first half of this year,” the statement reads.

The Fed pointed to “solid” job growth in recent months and rising consumer spending as reasons to back up their sunny view of the economy, though they did lament the fact that tepid business investment continues to cloud the economic recovery. The Fed decided to keep interest rates at between 0.25% and 0.5%, judging that while “the case for an increase in the federal funds rate has continued to strengthen,” it would “wait for some further evidence of continued progress toward its objectives” before raising rates for the second time in a year.

Though Fed chair Janet Yellen has been at pains to convince the public that politics plays no role in the FOMC’s decision making, the choice to stand pat this time around seems to have a lot to do with the election. As Vincent Reinhart, former head of the Fed’s monetary-affairs division and chief economist with Standish Mellon, predicted last week, the Fed would not act this week because not only do markets affect politics, but politics affect markets. Given that markets will naturally react to next week’s presidential election, it only makes sense for the Fed to wait and gauge that reaction before making its next move.

In fact, Reinhart argued that the Fed should have just moved this week’s meeting altogether, writing that such a meeting is “useless” just days before the polls open. But that would “lift the cloak of denial that Fed officials never look at the political calendar,” Reinhart wrote, suggesting that Fed economists would be afraid of how the public would interpret a rescheduling.

Another clue that the FOMC board members are particularly concerned about timing rate hikes is the fact that Boston Fed president Eric Rosengren joined the board members who wanted to keep rates where they are. Just two months ago, Rosengren dissented along with fellow members Esther George and Loretta Mester, voting against the majority and in favor of letting rates rise. Given that he has publicly said that he fears that keeping rates too low will necessitate much more aggressive, and therefore dangerous, rate hikes later, it seems that Rosengren’s vote shows how some members opinions can be changed by a meeting’s proximity to important political events.

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