The 2024 US elections – Part II: Monetary policy implications

Summary

The FOMC continues to face a difficult economic environment. Inflation has yet to recede all the way back to the Committee's 2% target, while resilient economic growth has stoked concerns it may prove more challenging to fully rein in price growth. Yet, with monetary policy restrictive and the lagged impact on the economy a major source of uncertainty, the risk of recession remains unusually high in our view.

Amid these economic crosswinds looms the U.S. presidential election. Chair Powell has steadfastly declared that politics will not play a role in the FOMC's policy decisions.

We agree with Chair Powell's message that the election will not be a major factor in monetary policy setting this year. When looking at the history of Fed policy changes in presidential election and non-election years over the past 30 years, economic conditions overwhelmingly dominate policy decisions across the following dimensions:

• Number of Policy Moves: The Fed has adjusted its policy rate nearly the same number of times in presidential election years as non-election years (an average of 2.7 and 2.9 times, respectively).

• Direction of Policy Moves: The FOMC has cut the fed funds rate by 46 bps on average in presidential election years while raising it by 25 bps on average in non-election years. However, these differences effectively disappear when excluding years in which the economy was in a recession (2001, 2008, 2020).

• Timing of Policy Moves: Looking across presidential election years shows the Fed has tended to maintain its charted course through the election, whether that be tightening (2004), cutting (2008) or remaining on hold (1996, 2012, 2020).

Even if monetary policymakers wanted to help one party over the other, which we do not believe is the case, it is not entirely clear which way they should lean. The delicate balancing act between reducing inflation—a prominent issue for voters this year—without causing untoward damage to the jobs market—a perennial issue for voters—remains. In the words of Chair Powell in his recent 60 Minutes interview: “it's not easy to get the economics of this right in the first place.”

This is not to say presidential elections have no implications for the monetary policy outlook. Changes in the composition of Congress and the White House, such as the Republican sweep in 2016, can lead to inflection points for federal fiscal policy, and, by extension, the outlook for the U.S. economy and monetary policy.

Furthermore, the president and Senate play a key role in determining the makeup of the Board of Governors. Jerome Powell's term as FOMC Chair ends in May 2026, while the four-year terms of Board of Governors Vice Chair Philip Jefferson and Vice Chair of Supervision Michael Barr will also expire during the next administration (in September 2027 and July 2026, respectively).

Our forecast for the federal funds rate in 2024 will be dictated primarily by our expectations for U.S. economic growth, employment and inflation and our view of the Fed's reaction to these developments. We do not think the election will play a major role in driving monetary policy decisions at the five FOMC meetings between now and Election Day. The Federal Reserve takes its independence very seriously, and the past 30 years of history suggests that macroeconomic conditions are the dominant force guiding monetary policy.

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