Fed Policy – Does It Have A Political Impact?

The Federal Reserve, led by Chairman Jerome Powell, is expected to announce an interest rate cut later this afternoon. Whether the Fed will reduce rates by 25 or 50 basis points has been a topic of hot debate on Wall Street, but an even hotter discussion in D.C. has surrounded questions about whether the Fed’s action will influence voters.

Former President Donald Trump clearly is worried about the Fed’s decision.

In a July interview with Bloomberg, he argued that Fed governors should not touch interest rates at all before an election.. (Notably, the last time the Fed reduced rates was in March 2020, about eight months before the election in which Trump ran for a second consecutive term. The Fed cut rates not once, but twice, that month.)

This week we will examine the history of interest rate cuts during an election year and how voters are generally feeling about the economy headed into the 2024 election, which, remarkably, is just six weeks away.

Does Fed Policy Influence Elections?

Recent history seems to indicate that the Federal Reserve’s monetary policy has very little impact on elections.

In 2022, a midterm election year, the Fed was in the middle of a campaign to ratchet up interest rates as part of its war against inflation. That year, neither the U.S. House of Representatives nor the U.S. Senate saw a partisan shift in power.

As noted above, the Fed lowered rates two times in March 2020. Those moves came after three rate cuts in 2019, from August to October. Still, incumbent President Donald Trump lost his reelection bid in November 2020 even though the Fed’s policy should have left voters with more money in their pocketbooks. The Fed hiked interest rates by 25 basis points in December 2015. If that decision had any effect at all on voters, it had likely worn off by November 2016, when President Trump was elected.

The 2008 Great Recession spurred the Fed to cut interest rates two times in October 2008. Those moves followed seven total rate cuts from September 2007 to April 2008. While there was no incumbent on the ballot, sitting President George W. Bush’s Republican party lost soundly to President Barack Obama that year. Democrats controlled both chambers of Congress and the White House coming out of the November 2008 elections.

There was some correlation between Fed interest rate policy and election outcomes in the 1990s. The Fed reduced interest rates three times in the 18 months before the 1996 presidential election. Sitting President Bill Clinton won a second term. Clinton was not on the ballot in 2000, but his vice president was. The Fed raised rates six times between June 1999 and May 2000 and Al Gore lost the election, but just by a hanging chad.

Correlation does not equal causation, however, and there were plenty of other factors at play in these elections – a global pandemic and a financial crisis, for example – just as there are today. Voters were undoubtedly considering a multitude of factors as they went to the polls, and there is no indication that interest rates topped the list of their concerns. Indeed, 18 consecutive rate cuts by the Fed between July 1990 and September 1992 did not keep the late President George H.W. Bush from losing his bid for a second term in 1992.

Does Consumer Confidence Increase After A Rate Cut?

As mentioned above, the last time the Federal Reserve reduced interest rates was on March 16, 2020. The Fed had cut rates just two weeks prior as well. On March 31, the Conference Board announced its index of consumer confidence plunged 12 points from February of that year.

Of course, there was something other than a Fed rate cut going on: the world was locked down due to the rapid spread of the COVID-19 pandemic. Markets were in free fall, businesses were reducing their workforces, and people feared for their lives.

The world was not in lockdown in 1990 and 1991, however. As noted above, the Fed cut interest rates 18 times between July 1990 and September 1992. And what happened to consumer confidence? According to the Federal Reserve Bank of Chicago, it plummeted just as fast as interest rates. Consumer confidence also declined nearly 20 years later, from 2007 to 2009, even though the Fed was cutting rates rapidly at that point.

One reason election outcomes or consumer confidence may not closely track Fed interest rate policy is that most Americans are not actually that familiar with what the Fed’s mandate is. For example, a March 2022 AXIOS/Ipsos poll found:

• Only seven percent of Americans said they know “a lot” about the Fed’s responsibilities. The vast majority either know nothing at all (21 percent), don’t know very much (33 percent), or know just a little (38 percent).
• Only eight percent of Americans at that point correctly identified that the Fed is tasked with maximizing employment, and only a little over one-third knew the Fed has something to do with stabilizing prices.
• Roughly half of Americans said they did not know whether the president could order the Federal Reserve to address inflation. (The president cannot.)

Here is the real zinger: only half of Americans knew that the Fed had raised interest rates the month the poll was taken. Sixty percent of GOP voters were aware of that move while only 46 percent of Democrats were.

All to say: policymakers may overestimate exactly how much Americans actually are watching the Fed’s interest rate policy.

Pre-Rate Cut: How Do Americans Feel About The Economy Right Now?

What may be more important than any one policy move is how Americans feel about the economy at the moment they enter the voting booth.

Today, these surveys indicate Americans are feeling, well, maybe a little better than okay, but certainly not great, about where the economy is and where it is headed.

In late August, Gallup released a survey that concluded “Americans’ outlook for the U.S. economy has improved this month, while their view of current economic conditions remains unchanged.” More specifically, Gallup said while “Americans have been consistently more negative than positive about the economy’s trajectory for over three years,” that seemed to change in August. Indeed, the percentage of Americans who said the economy is “getting better” had improved seven percentage points to 31 percent in that single month. August was one of only three times since 2021 that optimism about the economy has exceeded 30 percent.

Still, that poll also found 63 percent of Americans still believe the economy is “getting worse.” Perhaps unsurprisingly given the current Oval Office occupant, Republicans were more likely to say the economy is headed in the wrong direction than Democrats.

Like Gallup, YouGov has been asking voters how they feel about the direction of the economy for several years. Currently, about 49 percent of YouGov’s respondents think the economy is getting worse. That number is lower than Gallup’s and has fallen from 64 percent who thought the economy was getting worse just two years ago. Earlier this month, a Harvard CAPS-Harris poll showed 63 percent of respondents said the economy is on the wrong track, while 30 percent said it is on the right track.

Yesterday, AXIOS examined what recent consumer spending numbers indicate about how Americans feel about the economy today. AXIOS said, “those getting paychecks are still spending them, rather than preemptively hoarding cash.” Indeed, recent retail sales numbers have beat expectations. EY said the most recent retail sales reading was “decent” and “once again confirm[ed] consumers are spending more prudently, but not retrenching amid elevated prices and rates and reduced labor market momentum.”

There is one more important economy-related polling question. For months, Donald Trump has been leading both President Joe Biden and Vice President Kamala Harris on questions about who is better equipped to steer the economy.

Since the Harris-Trump debate last week, however, voters’ perspective on that question seems to have shifted.

Yesterday, The Financial Times reported that “Harris has consolidated her polling lead over Donald Trump on economic issues, especially among voters who watched the presidential debate last week.” Specifically, for the second month in a row, the Financial Times-Michigan Ross poll showed Harris in the lead. Forty-four percent of registered voters trust the vice president to handle the economy, but only 42 percent favor Trump. One month ago, Harris led on this question 42 percent to 41 percent.

Of the nearly three-quarters of voters who said they watched the debate, 48 percent said they trusted Harris more to manage the economy. The number was six points lower for Trump. The former president did have an advantage with people who had not watched the debate. Forty-one percent of that group said they trusted former President Trump more on the economy. Only 35 percent favored Vice President Harris. (The rest of those polled did not cite a preference.)

This shift is especially meaningful since it is Republican-leaning voters who are more likely to list the economy as their top issue. (Democrats are more likely to put healthcare and Supreme Court appointments first on their list of top issues.)

While the Fed’s move this week is not likely to move the dials too much, there are still plenty of matters that could, including jobs numbers, the stock market, and even how each respective party handles the upcoming debate about the continuing spending resolution to keep the federal government open. Right now, however, the slight edge on economic momentum is in Vice President Harris’ favor as the Fed considers how big a reduction to make in its target interest rate.