By Mike Walden
2024 is a big political year for the country. More so than in other years, decisions having national ramifications will be scrutinized for their potential impacts on election outcomes. This means those making the decisions will have to consider how their choices are interpreted.
Without question, one institution that will be front and center in this situation will be the Federal Reserve, usually simply referred to as the Fed.
In its role as the country’s central bank, the Fed has important regulatory responsibilities. The Fed also serves as a backstop for troubled banks so depositors will be secure.
Yet perhaps the Fed’s most prominent role comes from the Congressional mandate for the Fed to use its influence over interest rates and cash availability to help create a “Goldilocks” economy of both low unemployment and low inflation.
The last four years have shown the Fed flexing its muscles over the economy. During the pandemic years of 2020 and 2021, the Fed worked to lower unemployment — which had reached 14% — by pushing interest rates to historic lows and increasing the money supply by trillions. Then, when the inflation rate was headed to double-digit rates in 2022, the Fed reversed course by raising interest rates and pulling cash out of the economy.
As 2024 begins, it appears the Fed is again in transition. The unemployment rate has remained low and the annual inflation rate is near 3%, close to the Fed’s goal of 2%. The Fed has signaled it may be time to lower interest rates. However, there’s debate over how soon and how much.
Because this is a big political year, in some ways the Fed is in a no-win situation. If the Fed aggressively cuts its key interest rate, interest rates like mortgage rates, credit card rates and other borrowing rates will likely follow. More people will be able to buy homes, vehicles and other items, lifting consumer confidence and happiness. And, if people are more confident and happier, they may be more likely to reward incumbent politicians by voting for them. In reaction, opponents to the incumbents may cry foul, arguing the Fed’s interest rate cuts tipped the scales in favor of incumbents.
Conversely, if the Fed doesn’t reduce interest rates, or if it reduces rates very slowly, the opposite sentiments could emerge. Incumbents could conclude the Fed is prolonging consumers’ displeasure with high interest rates, and this unhappiness could be directed at incumbents in the voting booth. At the same time, opponents could try to link high interest rates to incumbents, giving opponents an electoral boost.
The Fed’s policies have been thrust into a presidential election campaign several times. In 1980 incumbent President Jimmy Carter was running for reelection. Inflation was a big issue, with the peak annual rate reaching 14%. In an effort to slow economic growth and moderate inflation, Fed Chair Paul Volcker increased the Fed’s key interest rate by10 percentage points in the second half of 1980. President Carter lost his reelection bid and partially blamed the Fed for his defeat.
A second example involves President George H.W. Bush’s reelection bid in 1992 following a recession in 1990 and 1991. As the Fed usually does, it lowered interest rates to help the economy recover from the recession. Lowering of interest rates continued into 1992, but significantly slowed in the months immediately prior to the November election. Bush lost the election, and, like Carter, publicly expressed his dismay with the Fed’s policy, implying that it contributed to his loss.
Perhaps the most famous example of the Fed’s potential role in an election is President Richard Nixon’s reelection in 1972. Inflation had been building in the 1960s and early 1970s as federal spending rose from the ongoing Vietnam War and new social programs. In this situation, the typical Fed policy would be to raise interest rates to counteract price pressures and higher inflation. Yet throughout Nixon’s first term from 1969 to 1973, the Fed cut interest rates by almost half. Some historians argue that Nixon lobbied the Fed chair at the time — who had been a longtime adviser — to enact that policy in order to help Nixon’s reelection bid. Nixon was overwhelmingly reelected, but the annual inflation rate eventually jumped to 12% in 1974.
As these examples demonstrate, Fed policies can impact elections, which is why both incumbents and challengers have an interest in following and understanding the Federal Reserve’s actions.
But my perception — if I may offer it — is that the Fed guards its reputation and uses its policies in the best way for pursuing the mandate of achieving low unemployment and low inflation. The Fed is an independent agency. Its budget comes from member banks, and most of those serving on the Fed’s governing board are appointed for 14-year terms by the president, with confirmation from the Senate. The chair of the Fed’s board is appointed for a term of four years.
The Fed is widely expected to reduce interest rates this year. These reductions will be watched for their size, frequency, and impacts on both inflation and employment. But it will be impossible to ignore the political implications of the Fed’s interest rate decisions. Analyses will be offered from a variety of perspectives. And then, once the elections are over, each of us will have to decide if the Fed’s policy decisions had any impacts on the results.
Mike Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.
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